March 5 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
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
"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
"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
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
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
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.