A group of Puerto Rican credit unions identifying themselves at the “G25” said Thursday the preliminary restructuring agreement announced by the Government Development Bank and hedge funds this week is unfavorable to local bondholders who will see losses as a result.
On Monday, the commonwealth defaulted on $367 million owed by the Government Development Bank for Puerto Rico, which only paid $22 million in interest due May 1 on some $3.8 billion in Senior Notes.
The GDB reached an agreement with its Ad Hoc Group of creditors holding some $900 million of that debt to defer $120 million of the debt service obligation. Hedge funds hold about 25 percent of the GDB’s total debt.
As part of the agreement, creditors and the GDB will continue negotiating over the next 30 days and hold off from pursuing legal action related to the missed payment during the talks.
The GDB also reached an agreement with Puerto Rico credit unions to implement a limited private exchange of some $33 million in notes maturing on the same date for newly issued bank notes with mostly the same terms, but maturing on May 1, 2017. But credit unions are still at the negotiating table for their outstanding debt with the GDB.
However, on Thursday, they said restructuring of the bonds cannot be subjected or be conditioned to the hedge funds’ negotiation terms, which they said would significantly impair the $13 billion credit unions and local individuals have invested in government bonds.
“Debt reduction cannot be achieved blindly, without acknowledging the full financial realities of each group of bondholders, especially those comprising a majority,” the G25 said in a statement based on proposals presented on their behalf by Attorneys José A. Sosa-Lloréns and Fernando Viñas-Miranda in U.S. Congress since February.
“For a hedge fund that acquired its bonds at a discount price in the secondary market, a reduction of principal is neither a losing transaction nor implies sacrifices of any sort. Depending on the moment of acquisition, the principal haircut can in fact translate into double digit gains for these speculative investors,” they said. “On the contrary, for traditional bondholders these principal haircuts represent a loss of capital and a loss of current income.”
The group, which said to be willing to continue negotiating with the GDB, the debt exchange instruments to be offered have to take into consideration each party’s true investments and an agreement in good faith has to be based on the interests of the majority of bondholders.
The GDB’s outstanding $3.8 billion debt is part of the Commonwealth’s total $48 billion debt that it will also seek to restructure in coming months. The two-pronged strategy calls for completing the GDB transaction first through an interim exchange, and then proceed to offer a second note swap, Melba Acosta said during a news conference at La Fortaleza on Monday.
“The GDB’s interest in achieving debt reduction is evident. However, to the extent that said reduction impairs the capital of the Puerto Rican savers and investors — be them members of our state chartered credit unions or direct holders of Puerto Rico bonds — the social benefit of reducing government debt will be offset by the damage to our economy,” the group said.
It is for this reason that the principal “haircuts” that the government proposals contemplate — which deliver their greatest damage upon Puerto Rico’s investors — end up laying the foundation for the trauma of a future default, they said.
They said without economic development policies and a government structure reform, the debt restructuring will only generate a “mega-deal” that will be brief and insufficient, “forcing us to repeat the process in the near future.” They said the government’s desire to cut the debt without taking into account the different circumstances of each bondholder has created an “unholy alliance” between the Commonwealth and the hedge funds.