Puerto Rico Says Government Development Bank Will Stay Open

  • Liquidity shortfall seen reaching as high as $1.3 billion
  • Regulator said in report that development bank is insolvent

Puerto Rico’s Government Development Bank will stay open and is examining all available options to improve its liquidity, according to Governor Alejandro Garcia Padilla.

The GDB, which lends to the commonwealth and its municipalities, owes investors a $422 million bond payment May 1 that Garcia Padilla has said can’t be paid. Officials are negotiating with investors to restructure the bank’s obligations and potentially enter into a forbearance agreement that would put off legal suits, Garcia Padilla told reporters Friday in San Juan.

“The rumors that the GDB will close are misleading and put in jeopardy the efforts of this administration to reach an agreement with bondholders,” the governor said. “We are doing all we can to avoid a receivership of the GDB.”

The commonwealth’s Commission of Financial Institutions, the bank’s regulator, stated in its most recent review of the GDB that the bank is insolvent and will face a liquidity shortfall of $1.3 billion in June. That determination allows the island’s Treasury Secretary to ask a court to appoint a receiver to oversee the GDB. It’s a move the administration has said it won’t make at this time. The bank in November warned that it was at risk of receivership.

“GDB representatives continue to engage with a considerable group of our creditors about the restructuring of the GDB’s debt,” Melba Acosta, the GDB’s president, said in a statement Friday. “As we have stated publicly, the government is also considering additional measures to address this situation, such as declaring a temporary moratorium on payments, and amending the GDB charter.”

Congressional Bill

The GDB serves as Puerto Rico’s financial adviser and structures municipal-debt sales for the island. The bank’s cash crunch has hampered its ability to lend to the commonwealth and provide short-term funds. The bank is also overseeing negotiations with creditors to reduce the island’s $70 billion debt load. Puerto Rico’s economy has struggled to grow since 2006 and 45 percent of residents live in poverty. With an 11.7 percent unemployment rate, people are leaving the island to find work on the U.S. mainland.

The House Natural Resources Committee Tuesday made public a discussion draft of a bill that would set up a federal control board to oversee any debt restructuring and review yearly budgets. After the May 1 GDB payment, Puerto Rico and its agencies will owe another $2 billion of principal and interest.

“It is important that everyone in Puerto Rico understand that the GDB’s fiscal standing, as well as the commonwealth’s fiscal standing, is delicate due to the fiscal crisis we are confronting,” Acosta said. “For this reason, the GDB’s Board of Directors and management continue to urgently evaluate all available options to safeguard public finances.”

Wal-Mart Decision

The GDB is experiencing a liquidity shortfall that will reach a negative $1.3 billion in June, according to a Monday court opinion of Wal-Mart Stores Inc.’s successful suit against Puerto Rico to end a tax that applied its highest rate on the retailer. The opinion quoted from the commission’s November report, which isn’t public.

The commission’s report found that the bank’s “liquidity levels are critically deficient in relation to its weakened financial conditions caused by an elevated debt exposure and obstructed access to capital markets,” the court opinion quoted from the report.

The bank has disputed the findings. Acosta is cited in a footnote in the report as saying the report was “obviously written by someone who doesn’t understand the GDB.”

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