(Adds statement from GDB)
SAN JUAN, Puerto Rico, July 24 Pending legislation in Puerto Rico could protect the U.S. Commonwealth in a potential restructuring of the Puerto Rico Highways & Transportation Authority (HTA), which owes the Government Development Bank over $2 billion.
Under the bill, quietly filed in late June near the end of the last legislative session with no public hearings, the island's infrastructure authority PRIFA would use tax revenue that goes to HTA to issue bonds and use the proceeds to pay off its debts with the GDB.
The bill has not yet been approved but the House and Senate finance committees issued reports calling for its passage and lawmakers are expected to approve the measure when they return to session next month.
"It is necessary to identify an entity that has better access to the market to assume the HTA's debt and in this way partially repay the debt to the GDB," GDB interim President Jose Pagan said in a memo that was filed with the bill.
It is unclear who would buy the debt. Puerto Rico has essentially lost access to capital markets since it passed a law in June that allows public corporations, such as HTA, to restructure their loans. The law led to a raft of downgrades from ratings agencies and a selloff in Puerto Rico's bonds.
However, a group of hedge funds who support the restructuring law, among them Fir Tree Partners and Monarch Alternative Capital, have said they would willing to provide Puerto Rico with financing. The group, known as the "Ad Hoc Group" did not immediately comment.
HTA has nearly $5 billion outstanding debt with bondholders beyond the $2 billion with the GDB.
Robert Donahue, managing director at Municipal Market Advisers, sees the move as an attempt to isolate "GDB's exposure to the Highway and Transportation Authority."
"The bill does not explicitly state the HTA will need to be restructured, but it does appear that it would isolate the GDB from the impact of HTA debt write down if the agency files for protection under the restructuring act," Donahue said. "It is unclear whether this legally is possible without violating bondholder covenants, and/or could be voided as an unlawful preferential transfer."
Puerto Rico officials insist that the law passed in June, known as the Puerto Rico Debt Enforcement and Recovery Act, is aimed at the electric power authority PREPA, which has over $9 billion of outstanding debt.
"With the support of Governor Garcia-Padilla, the GDB is working with HTA on options that would allow HTA to become financially self-sufficient without availing itself of the Recovery Act," the GDB said in a statement.
Still, news of the bill came just weeks after the Recovery Act was quickly passed. "There is a growing sentiment that Puerto Rico officials haven't acted in good faith and consistent with previous statements," said Donahue.
During an investor webcast earlier this month, a potential PRIFA bond deal was mentioned as a possible source of future financing. GDB Board Chairman David Chafey said Governor Alejandro Garcia Padilla has ordered the GDB and HTA to resolve its financial situation without resorting to the Recovery Act. (Reporting by Reuters in San Juan; Editing by Chizu Nomiyama and Andrew Hay)