Puerto Rico Skips $422M Bond Payment, Looks for a Deal

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Puerto Rico's Governor Alejandro Garcia Padilla, shown in February, said Sunday that the government made a "painful" decision to skip a $422M bond payment. Reuters

Puerto Rico's Government Development Bank (GDB) said it reached a tentative debt restructuring framework with some of its major creditors, just hours after declaring it will skip making a $422 million bond payment due on Monday.

The framework is "a vital first step" that needs both restructuring legislation from the U.S. federal government and participation from all of the GDB's creditors in order to work, the bank said in the statement issued late on Sunday.

Talks between the GDB and some of its major creditors, who call themselves the Ad Hoc Group and hold roughly $935 million of GDB debt, will continue for the next 30 days. The creditors said in a statement on Monday they would not pursue legal action during that time, although that does not preclude smaller investors from filing lawsuits.

The GDB default is the most significant yet in Puerto Rico, because the bank acts as the main depositary and liquidity source for public agencies such as the island's highway and infrastructure authorities.

The GDB said it reached indicative terms of a deal with the creditor group holding about a quarter of the nearly $4 billion in bonds. The group would agree to a two-step debt exchange, ultimately recouping about 47 percent of what they are owed.

"The financial concessions contemplated by the proposed restructuring are intended to help stabilize the operations of GDB and to support the Commonwealth's efforts to restructure its other financial obligations," the creditors said.

One major investor, who requested anonymity while talks are under way, said there is discussion over reducing the need for 100 percent of creditors to agree to the terms.

"If we can get that down to 95 percent participation or so, we think we can get there, without any federal legislation," the investor said.

A second investor, not involved in the talks, said they were waiting to see how any deal would work and hoped rules overseeing bond agreements are not changed after the fact.

"These bonds have been under-performers for years, so from a buy-and-hold perspective, we are not sellers here," said the investor who requested anonymity because of the ongoing talks.

"I'm unlikely to buy again if they are not transparent and change the rules governing their debt after the fact," said the second investor whose firm manages more than $10 billion.

The GDB's 2011 Series B senior notes that are going unpaid were quoted around 32 cents on the dollar in early afternoon New York trade, according to Thomson Reuters data.

'Urgent response' needed

In a televised speech on Sunday evening, Puerto Rico Governor Alejandro Garcia Padilla imposed a moratorium on the debt payment, a "painful" decision he blamed on the absence of U.S. Congressional action to solve Puerto Rico's debt crisis.

The GDB is paying only the interest portion of its debt.

The U.S. territory faces $70 billion in debt, a staggering 45-percent poverty rate and a shrinking population as it enters the most dire stretch of its fiscal crisis. It owes another $1.9 billion on July 1 that Garcia Padilla has said it cannot pay.

Congress is debating a bill that would put the island's finances under federal oversight and allow it to restructure debt in a bankruptcy-like process, but the bill has faced criticism from conservative and liberal wings of both parties.

Pedro Pierluisi, the island's representative in Congress, spread the blame for the dire financial situation.

"Puerto Rico is in this situation for two reasons: profound inequality at the federal level and profound mismanagement at the local level," he said in a statement on Monday.

White House spokesman Josh Earnest told reporters on Monday he hoped developments would push Congress to act and give the island needed restructuring authority.

"I sure hope it creates a new sense of urgency for Congress to address this situation," Earnest told a briefing.

"This situation requires an urgent response, and Republicans in Congress have been dragging their feet for too long," he added.

As a U.S. territory, Puerto Rico does not have access to municipal bankruptcy protection.

The Ad Hoc Group includes hedge funds Avenue Capital Management, Brigade Capital Management, Claren Road Asset Management, Fir Tree Partners, Fore Research & Management and Solus Alternative Asset Management.