Puerto Rico Declares Emergency Period for Development Bank

QuickTake: Puerto Rico's Swelling Debt
  • Executive order allows governor to preserve bank liquidity
  • Governor says he won't suspend the bank's debt payments

Puerto Rico Governor Alejandro Garcia Padilla’s declaration of a state of emergency at the Government Development Bank to halt the erosion of the bank’s dwindling cash by allowing withdrawals only to fund health, public safety and education services is raising the risk for creditors as the island heads toward default.

Garcia Padilla announced Saturday that he declared the emergency period for the Development Bank, which lends to the commonwealth and its municipalities and serves as the island’s fiscal agent, so it can continue supporting essential services. That decision allows the governor to change the bank’s structure to save its remaining assets and begin a receivership process as its economy shrunk.

The bank, created in 1942, will now move into a new era after advising Puerto Rico and its agencies on borrowings and crafting debt sales to pitch to mainland investors. The commonwealth is seeking to reduce a $70 billion debt load after years of borrowing to cover budget deficits.

“They were the face of Puerto Rico to the financial markets and to the investment banks and the rating agencies,” Ted Hampton, an analyst at Moody’s Investors Service, said about the Development Bank. “And they would facilitate borrowing for all of these entities.”

The emergency period comes as the House committee plans to hold a hearing Wednesday on a bill that would address Puerto Rico’s financial crisis. That legislation will include a federal control board to manage the commonwealth’s budgets and oversee any debt restructurings.

Garcia Padilla’s emergency measure is part of a debt-moratorium bill he signed into law last week that enables him to suspend principal and interest payments on all island debt through January 2017. He won’t impose a moratorium on GDB debt payments as the bank is negotiating with its creditors about $422 million it owes May 1, the governor said in a statement Saturday. The law also safeguards Puerto Rico’s agencies and the bank from law suits by implementing a stay on such legal filings.

The bank has $562 million of liquidity, according to the debt-moratorium law. Government agencies have been asking to withdraw their deposits, which totaled about $3.9 billion in the bank as of Sept. 30. The governor can now restrict those withdrawals so that agencies can use the money only for essential services.

Declaring an emergency period allows the governor to create a bridge bank that would take on some of the GDB’s liabilities, including deposits, and continue certain functions of the bank by appointing a fiscal agent to oversee its operations, according to debt-moratorium legislation that the governor signed into law this week. It also enables Garcia Padilla to begin a receivership process for the bank.

The island’s commission of financial institutions, the bank’s regulator, concluded in its most recent review in November that the GDB is insolvent, a determination that allows the administration to place the bank in receivership. It faces a potential $1.3 billion shortfall in June, according to the commission. Hedge funds that hold the bank’s bonds sued it on April 4 to stop it from returning deposits to public agencies and municipalities.

The bank had $10.7 billion of total assets -- including loans to public corporations -- and $8.8 billion of total liabilities, as of June 30, 2015, according to the commonwealth’s latest financial data.

Puerto Rico and its agencies owe $2 billion to investors on July 1, which the governor has said the island can’t pay. The commonwealth’s economy has shrunk in the past decade and residents are leaving at record rates to find work on the mainland.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE