NEW YORK (Reuters) - Debt-laden Puerto Rico announced on Monday that the Government Development Bank, once the primary fiscal agent for the U.S. territory, has reached a liquidation deal with its creditors, avoiding a protracted bankruptcy.
The agreement would be executed through a so-called Title VI proceeding under PROMESA, the federal rescue law for Puerto Rico, according to a statement from Governor Ricardo Rossello’s office. That would avoid a Title III bankruptcy.
GDB is a microcosm of Puerto Rico’s historic economic crisis, which is marked by an untenable $70 billion debt load, 45 percent poverty rate, and near-insolvent public health and pension systems.
The bank’s assets will be split between two separate entities, according to a term sheet made public on Monday.
The first, holding $5.3 billion in GDB assets, would issue three tranches of debt with different protections in exchange for varying principal reductions. Beneficiaries would include municipal depositors and bondholders like Avenue Capital Management, Brigade Capital Management, and Fir Tree Partners.
The second entity, funded with public entity loans and $50 million in cash, would benefit all other depositors.
Rafael Rojo, a spokesman for a group of small bondholders in Puerto Rico, said the deal could mean losses of up to 45 percent for some bondholders. But “before we are bondholders, we are Puerto Ricans, and we recognize the circumstances that Puerto Rico faces,” Rojo said in the statement issued by Rossello’s office.
Puerto Rico’s government as well as its sales tax authority, COFINA, are in bankruptcy under Title III of PROMESA, with initial court hearings scheduled for Wednesday in San Juan. Other island agencies are undergoing debt restructurings out of court.
GDB’s plan represents an end to what was once the equivalent of a central bank in charge of holding deposits from government agencies and municipalities.
Puerto Rico’s federal financial oversight board last month approved a plan to wind down the bank, which had been a shell entity since the island’s former governor declared a state of emergency in April 2016. GDB defaulted on $422 million of debt the following month.
“This agreement is an example of the government regaining the credibility it had lost over the past few years,” Rossello said in the statement on Monday.
Bradley Meyer, a financial adviser for a key group of bondholders, said the group “looks forward to the final documentation and fast implementation of the deal.”
Reporting by Nick Brown; Editing by Paul Simao