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By Daniel Gill
The restructuring of the Government Development Bank for Puerto Rico is closer to approval after resolving creditor committee challenges over the reorganization of the territory’s massive debt.
The deal may preview what creditors might expect to recover in Puerto Rico’s bankruptcy-like proceedings.
The GDB and the committee filed a stipulation Oct. 9 in the defunct bank’s restructuring of its $4 billion debt under Title VI of the federal Puerto Rico Oversight, Management and Economic Stability Act.
One research specialist closely following the case told Bloomberg Law that the bank’s workout sets a floor for recovery in the island’s overall case under Title III of PROMESA—about 55 cents on the dollar.
The bank’s Title VI case is separate and distinct from the Title III cases filed by Puerto Rico and some governmental entities, such as the island’s debilitated electric utility, known as Prepa.
PROMESA’s Title VI offers a remedy that isn’t available in municipal bankruptcies filed in the mainland, Cate Long told Bloomberg Law Oct. 9.
Long’s Puerto Rico Clearing House is a research service consultant for holders of Puerto Rico bonds.
It permits the municipal entity—the GDB —to negotiate directly with pools of bondholders to reach a consensual modification of bond indenture terms. If a modification agreement is approved by a majority from a quorum of at least two-thirds of the bondholders, it can be approved by the court.
With approval of the Puerto Rico legislature and the federally appointed oversight board driving the commonwealth’s restructuring, the GDB proposed a modification which was approved by 97 percent of the 74 percent of voting bondholders, Long said.
The deal establishes a Public Entity Trust that will issue new bonds. The trust will be funded by transfers from the GDB of $20 million to $30 million in cash deposits, real estate, and a portfolio of loans to municipalities.
The GDB previously was the “last resort for loans” available to municipalities, John Mudd told Bloomberg Law Oct. 10. Mudd is a Puerto Rico attorney who represents a number of creditors with claims against the government.
The creditors committee and others have claimed that the GDB’s management and operations are at the center of the island’s financial crisis. In papers filed with the court, the committee referred to the bank as the “financial brain trust” of Puerto Rico.
“The GDB was the rotten heart of the Puerto Rico insolvency,” Long said, adding that bad debt got buried there.
But the modification is great, a big success, she said.
“I hope Title VI can eventually be used in other municipal bankruptcies,” she said.
It took a lot of work to organize this agreement, which should provide a 55 cent return for bondholders, Long said. A substantial number of these bondholders are credit unions throughout the territory, representing savings of hundreds of thousands of residents, she said.
Mudd said that a number of these credit unions have alleged that they were duped into buying GDB bonds.
“It was looking pretty dicey for a while for the credit unions,” Long said.
She said the deal is well-structured and sets the floor for the recovery on unsecured debt in the main Title III cases.
“It’s the only deal you’re going to get,” Mudd said, but he foresees potential problems for the future.
“It’s more likely than not that the new trust will end up in a Title III proceeding of its own,” he said.
It all depends if the loans are paid, which is unlikely, he said.
The modification still needs to be approved by the court, and there’s a hearing on the matter scheduled Nov. 6.
Although a few objections to the modification remain, “it’s as good as done,” Mudd told Bloomberg Law in an Oct. 9 email.
The GDB is represented by O’Melveny & Myers LLP. Paul Hastings LLP represents the creditors committee, and Proskauer Rose LLP represents the Oversight Board.
The case is The Government Development Bank for Puerto Rico, D.P.R., 18-1561-LTS, Stipulation 10/9/18.
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