UPDATE 2-Puerto Rico hires restructuring expert as financial adviser

Wed Mar 5, 2014 9:07pm EST

March 5 (Reuters) - Puerto Rico's Government Development Bank has hired a restructuring expert to evaluate potential funding sources and financial proposals for the bank and commonwealth, it said on Wednesday, less than a week before the commonwealth's expected multi-billion dollar municipal bond offering.

The GDB, which acts as the territory's central bank, said the hiring of Millco Advisors LP, a Washington, D.C.-based affiliate of Millstein & Co LP, should not raise fears of default.

"We can say clearly, we have not hired anyone to advise on restructuring. Millco is simply acting as a financial adviser and has been very helpful with various aspects of the fiscal plan," said GDB spokeswoman Betsy Nazario.

Still, the news is expected to roil a U.S. municipal bond market that has been growing increasingly anxious about the island's financial deterioration. As a territory, Puerto Rico cannot file for protection under Chapter 9 of the bankruptcy code. But the commonwealth said in a draft statement for the bond sale that the GDB is investigating measures akin to a bankruptcy filing.

"I don't see how this helps demand in any way," said Robert Donahue, managing director of Municipal Market Advisers, adding Puerto Rico should have made the announcement weeks ago. "It seems like a bad idea to disclose this right before a huge deal, especially given Millstein's background."

Jim Millstein, the firm's chief executive and founder, served as chief restructuring officer at the U.S. Treasury until March 2011, overseeing the agency's huge investments to prop up the financial sector and designing the restructuring of American International Group.

Millco will help the GDB analyze cash flow projections and the liquidity of the commonwealth government, as well as its capital structure and underlying liabilities. The analysis will extend to all government agencies and public corporations.

The commonwealth has around $70 billion in outstanding debt and next week's deal will help restructure some of that. Most of the proceeds, which could reach $3.5 billion, will be used to refinance existing debt and cover debt service.

Investment bankers in San Juan expect the deal to price on Tuesday, with yields in the 9 percent range.

LIQUIDITY STRESS INCREASES

Millco's hiring was announced in a detailed liquidity report that gave a glimpse of how the territory's mounting economic and financial problems have sucked more than $1 billion out of the GDB in less than six months and forced it to sell $500 million in assets.

At the end of 2013 and beginning of this year, yields on Puerto Rico's debt shot up and its credit spread to top-rated bonds widened. By last month all three major rating agencies had cut its credit score to junk, citing low liquidity and persistent economic decline.

Apart from acting as a central repository, the GDB raises money and lends it to the commonwealth and an assortment of municipalities and agencies. Virtually all those borrowers are behind on their loan payments. At the same time the bank has had to provide them short-term financing to help to pay off other debts, according to the report.

From Sept. 30, 2013 through Wednesday, the bank had loaned the commonwealth $543 million to repay bond anticipation notes and also put up $136 million for draws made on its letters of credit securing infrastructure bonds that failed to be remarketed.

The rating downgrades triggered collateral requirements and terminations on some of the territory's swaps, and the GDB had to post $72.6 million of collateral and also pay out $40.9 million in termination fees.

During this period, GDB also repurchased from commercial banks about $240 million in participations of loans made to the commonwealth, according to the report.

Primarily to cover the draws on letters of credit and make interest and debt service payments, the GDB tapped its $500 million of cash and investment securities as of Jan. 31, when liquidity resources totaled $2.2 billion.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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