The Government Development Bank for Puerto Rico is negotiating with investors to reduce the par value of some of its notes by 47%.
The GDB owes $422 million on Monday, a sum Puerto Rico officials have said it won't be paying.
The bank is in negotiations with a group of debt holders who are owed $120 million, GDB president Melba Acosta Febo said, confirming a report in the El Vocero news website. It is seeking a forbearance agreement under which this group would refrain from enforcing debt remedies for a period of time. It is also in negotiation with another group owed a smaller amount of debt.
The terms of at least one deal under negotiation would be that the debt holders would get recoveries as little as 53 cents on the dollar. Certain deals under discussion would involve extending maturities.
"Sometimes you might think that 47% is a big discount, but you have to look at how these notes are being exchanged right now," Acosta Febo said.
On Tuesday Markit reported a block-sized trade of 4.375% taxable 2019 GDB senior notes was made at 23.5 cents on the dollar. This was 1.5 cents lower than Market's estimate for the debt in the preceding five days.
By comparison, Markit estimated Puerto Rico 5% general obligation bond maturing 2041 as trading at 58 cents on the dollar Wednesday, down from a high of 60 cents in the previous week.
Any deal struck with GDB debt holders now will ultimately be part of a larger Puerto Rico debt restructuring, Acosta Febo said. She said she wanted to be sure the numbers would make sense for Puerto Rico.
The debt negotiations came as efforts to pass a bipartisan bill in the U.S. Congress to deal with Puerto Rico's debt crisis faltered. In December House Speaker Paul Ryan directed that a bill be put together for this purpose by May 1. Puerto Rico's nonvoting member in the House Pedro Pierluisi said earlier this week that he expected the House to not act until July. After that point, any bill would still have to be passed by the Senate and signed by the president before becoming law. Even then, it could take time to make the law operational.
Bond analysts said the developing deal for the GDB was unlikely to be a precedent for other Puerto Rico debt.
"The insurers have a lot less presence here," John Mousseau, director of fixed income at Cumberland Advisors said in an email. "They would never be able to do that otherwise. I think [the potential GDB deal] has ZERO shot at being a precedent for other bond holders. How would you take away from [Puerto Rico Sales Tax Finance Corp.] COFINA bondholders revenue that has been pledged to pay bondholders? Bondholders would gladly take their shot in court with any kind of revenue pledge versus 47%."
Howard Cure, directors of municipal research at Evercore Wealth Management, and Municipal Market Analytics partner Matt Fabian agreed that GO, COFINA, and utility bondholders are supported by legal remedies or other factors that will make them less willing to take substantial haircuts.
The offer to the GDB note holders is "fantastic" if the offer is to pay in cash, Fabian said. However, it is not so good if the offer is for new certificates to replace the notes. This is because the financial health and even existence of the GDB is doubtful going forward. Any certificate would be of limited value in the secondary market, he said.
As of August 2015 the GDB had $4.61 billion in debt.
