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April 7 Puerto Rico's Government Development Bank, the U.S. commonwealth's financing arm, has hired Cleary Gottlieb Steen & Hamilton, a New York-based law firm with a specialist practice in financial restructuring, the firm and bank said on Monday.
Cleary Gottlieb is the second restructuring expert retained by the development bank in the past month. In March, just days before a $3.5 billion bond sale that helped the island avert a looming cash crunch, the bank hired Millco Advisors LP, a Washington-based affiliate of the firm Millstein & Co.
The GDB insists it regularly contacts law firms for advice about its financing plans, but the second such move in as many months may raise eyebrows with investors who have long suspected the economically stressed commonwealth will eventually seek to restructure some of its hefty $70 billion debt load.
"As fiscal agent to the Commonwealth and its instrumentalities, the GDB regularly solicits advice and counsel from a number of legal and financial advisors with respect to financing plans and other related matters," the bank said in a statement. "Cleary Gottlieb Steen & Hamilton LLP were engaged by the GDB as part of these ongoing efforts. As is customary, GDB does not comment on the nature or content of any legal advice."
The Cleary Gottlieb hiring was first reported by the Wall Street Journal. A spokesman for the firm confirmed it had been hired by Puerto Rico but declined to provide any other details.
"It could be a red flag, but I'm sure they're covering all their bases and they probably are looking at other ways of borrowing," said Richard Daskin, the chief investment officer of RSD Advisors in New York, of the news that Puerto Rico had hired another restructuring specialist.
"It's definitely not fire, it might be smoke, but it might be good transparent disclosure," he said. "I don't love hearing it, but I'm not panicking over it."
Puerto Rico pulled off a blockbuster of a bond sale in March that was heavily oversubscribed, With non-traditional municipal market investors, such as hedge funds, taking a prominent role.
The sale spared it from the threat of imminent default, but few who have followed the Caribbean island's financial troubles doubt that a massive restructuring is in its future.
Because the U.S. territory is not eligible for bankruptcy, some think restructuring its debt load could look more like the experiences of countries such as Argentina than U.S. cities like Detroit.
"This could just be an outgrowth of how they find an economic and financial fix," said Michael Comes, portfolio manager and VP research in Cumberland Advisors in Sarasota, Florida. "It just tells us that they're really pulling out all the stops. This is a big objective for them to fix the economy and achieve stability."
Puerto Rico's newly issued debt traded with a yield of 8.7 percent on Monday. (Reporting by Luciana Lopez and Edward Krudy; Writing by Dan Burns; Editing by Jonathan Oatis and Grant McCool)