Wednesday, February 19, 2014

Puerto Rico's Latest Disclosures Regarding Liquidity

Yesterday, Puerto Rico published a new disclosure document and a slide presentation in connection with its upcoming bond offering. An excellent summary and trenchant analysis is provided by Cate Long at Reuters MuniLand. Below are what I think are among the crucial disclosures with respect to the Commonwealth’s liquidity crisis.
Bottom line: Unless the planned bond offering is successful, there is a significant risk that Puerto Rico will default and seek protection from its creditors under local law. Such circumstances make major fundraising difficult and raise the risk of a restructure.

1. GDB Liquidity
“One challenge that GDB faces is limited liquidity. The liquidity position of GDB has been adversely affected by, among other factors, the significant increase in credit spreads for obligations of the Commonwealth and its instrumentalities during 2013, by the limited market access experienced by the Commonwealth and certain of its public corporations during the second half of calendar year 2012 and calendar year 2013, by a significant reduction of liquidity in the local Puerto Rico capital markets, and more recently by the credit downgrades described above. These factors have resulted in delays in the repayment by the Commonwealth and its instrumentalities of their loans to GDB and, at the same time, caused the Commonwealth and its instrumentalities to rely more heavily on short-term financing and interim loans from GDB and other lenders.”
My conclusion: The government has exhausted its cash resources and is unable to repay its loans from the GDB.

2. Additional Funding Required
“The Commonwealth needs to obtain significant additional funding before the end of the fiscal year in order to repay interim loans and other obligations that are owing to GDB, and therefore allow GDB to continue serving as liquidity provider to the Commonwealth and its public corporations. Although the Commonwealth intends to access the capital markets in the near term, its ability to do so and the terms of any such financing are uncertain.”
My conclusion: The government/GDB will run out of cash this spring and must find significant additional funding before June.

3. Emergency Measures and Insolvency Risks
“The Commonwealth and the public corporations could also seek relief under existing Commonwealth law or under laws enacted in the future regarding insolvency, reorganization, moratorium and similar laws affecting creditors’ rights, which could affect the rights of the holders of bonds and notes of the Commonwealth and its public corporations and the enforceability of the obligations to make payments on such bonds and notes.”
My conclusion: Puerto Rico may seek insolvency protection under Puerto Rican law which could impair bondholders and other creditors.

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