During the next two to three years, the Government Development Bank (GDB) will deploy a voluntary separation program for its 204 employees or they may be transferred to other agencies through the Sole Employer program; will sell most of its assets and will seek to collect on as many loans as possible.  This notwithstanding, the GDB will not have enough funds to pay its bondholders and depositors, according to the liquidation plan certified yesterday by the Oversight Board (OB). 

According to said plan, as of last January, GDB had a deficit of approximately $891 million, a situation that, according to its President, Christian Sobrino, barely allows disposing of the scant resources held by the institution and distributing what may be obtained among the bondholders and depositors.

Yesterday, after half a century assisting public corporations and the Central Government, and being the credit card for projects of governors who did not last more than four years, the BGF had no other voice in its favor than that of Sobrino, who as possibly the institution’s last president, had the task of petitioning the OB to authorize a plan for the gradual closure of the financial institution.

“The sustainability analysis of the debt included in the plan indicates that it is not possible to serve depositors, bondholders, and other creditors under the applicable contractual terms,” Sobrino told the members of the OB.

The GDB’s fiscal plan was the first matter considered, following the administrative matters, by the JSF, which agency held its seventh public meeting at the auditorium of the Alexander Hamilton building, which also lodges the Bankruptcy Court for the Southern District of New York.

During the meeting, the OB also certified the fiscal plans for the Electric Power Authority (PREPA), and also those of Highways and Transportation Authority (PRHTA) and the Aqueduct and Sewer Authority (AAA, by its Spanish acronym).

Depositors or bondholders

Sobrino made it clear that the fiscal plan does not define what will undoubtedly be a judicial controversy: how and when will the little money generated by the GDB over the 10 years be distributed among the institution’s bondholders and depositors.

Regarding the GDB, the bondholders –who hold about $3,877 million in bank notes – usually have the same preference as depositors, the majority of which are agencies and municipalities.  According to the plan, the latter hold about $3,520 million in deposits.

Among the major depositors that could be most affected by the GDB’s liquidation there is the Treasury Department, the Authority for the Financing of Infrastructure, the University of Puerto Rico, the Science and Technology Trust, and the municipalities of San Juan and Carolina.

In the meantime, the GDB also has its hands tied with private entities and other agencies, since it is the guarantor of hotel projects and bond issues that it ultimately will not be able to honor.

Regarding the Tourism Development Fund (TDF), for example, the GDB has sureties worth $247.5 million in a limbo, and regarding the underwriting of issues or funding for other agencies, another $345 million are outstanding.

GDB has a mere $6,507 million to pay all stakeholders.

According to Sobrino, in view of the large number of outstanding obligations, the best course of action is the orderly liquidation of the bank’s assets and, concurrently, continue with the collection of the few good loans on record.  That is, the GDB intends to continue collecting loans granted to municipalities and similar, and distribute said collections among its creditors and depositors.

The members of the OB approved this and endorsed the plan proposed by the GDB and recommended by the executive director of the Fiscal Agency and Financial Advisory Authority (FAFAA), Gerardo Portela, who is now discharging the former duties of the bankrupt institution.

The end of an era  

Before declaring the death of the GDB, both the former head of the institution, José R. González, and Law Professor and Bankruptcy expert, David Skeel, regretted that there was no way to save the GDB.

“As former president of the GDB 30 years ago, it is with great sadness and reluctance that I accept the conclusion that the GDB cannot continue operating as a viable entity and that a fiscal plan applies, which, in essence, is to close its operations in an effort to maximize its assets and allocate them in an orderly fashion”, González said.

In turn, Skeel stated that although the GDB played a vital role in Puerto Rico’s economy, it was best to end its operations.

As opposed to other agencies in a precarious condition due to unsustainable operating expenses, in the case of GDB that line item is merely 6% of its income.

According to González, the current President of the Federal Home Loan Bank of New York,

the end of the GDB was caused by the Central Government’s inability to meet its obligations.

During the time he chaired the GDB at the start of his career, Gonzalez, an economist, lawyer, and banker, set the precedent by driving, for the first time, a uniform public policy so that the institution and the various Government agencies that manage financial assets would adopt procedures for the sound administration of that patrimony.

GDB’s failure occurs one year after its former president, Melba Acosta Febo, reached a preliminary agreement with the bondholders, who almost accepted 47 cents per dollar invested.  The agreement, which required 100% of the bondholders’ approval, was never reached.

Doubts regarding the process. According to economist Antonio Fernós Sagebién, the end of the GDB may represent one of the first controversies aired in the courts, and also one of the first petitions filed under Title III the PROMESA.

The economist stated that the dissolution of the GDB may fall in the hands of a receiver, according to its enabling law, or perhaps there could be applied a liquidation mechanism based on PROMESA. 

The closure of the GDB will mark the fifth failure of a banking institution in Puerto Rico since 2010.  It also implies the end of the sole entity that could be considered a central bank at a state level in all of the United States.

No financial statements.  The FAFAA further informed last night that the Government will not submit its financial statements for fiscal year 2016.

According to the Federal Securities Law, the Government must submit its financial statements no later than May 1, each year.  The notice assumes that, for the fifth year in a row, Puerto Rico will not meet this federal requirement for issuers of municipal debt. 

The Island’s last audited report was for fiscal year 2014.

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