Puerto Rico is getting a thorough introduction to Michael Milken's junk-bond world as it increasingly relies on some of the financial industry's most aggressive players to solve its crippling financial troubles.
With the U.S. territory's Government Development Bank saying it will run out of cash by Sept. 30, the island's leaders have turned to a group of 35 hedge funds that hold the commonwealth's debt and could recapitalize the bank through a planned $2.9 billion oil-tax bond deal.
For Puerto Rico, the money comes with a catch: The potential investors are bringing their full arsenal of junk-bond tricks with them. The terms they're asking for, such as payment guarantees and strenuous debt protections, typically aren't used in municipal bond deals. But they are a regular part of raising money for the riskiest borrowers in the realm of speculative-grade debt, which is where the territory has been for the last year and a half.
"If you come and do a rescue financing for a company, you can ask for anything," David Tawil, president of New York-based distressed-debt hedge fund Maglan Capital and a former restructuring attorney, said by telephone. "These asks that are potentially shocking to the muni world are by no means shocking to the distressed corporate world. These sophisticated investors are bringing in a lot of developed know-how to these situations."
Fiscal Vise
The group of investors, led by Fir Tree Partners and Monarch Alternative Capital, have been pressing Puerto Rico's government and finance officials for months with a list of requirements that they want from the GDB, the island's lender and the agency coordinating the deal. Proceeds would help repay obligations owed to the GDB, which will run out of cash by Sept. 30 unless the Infrastructure Financing Authority sells the bonds or figures out another rescue maneuver.
Russ Grote, a spokesman for the hedge-fund creditor group at Hamilton Place Strategies in Washington, and David Millar, a spokesman for the GDB at Sard Verbinnen & Co. in New York, both declined to comment.
The hedge fund demands come as Puerto Rico increasingly finds itself in a fiscal vise. It's saddled with $72 billion of borrowings and dwindling financial resources as the local economy shrinks. Its cash-strapped electric utility also is dealing with another set of creditors to restructure its $9 billion of debt. The power provider known as Prepa has to make a $416 million payment on July 1.
Default Protection
To protect themselves from default, the 35 hedge funds negotiating with the GDB want to be allowed to demand a full, immediate repayment if the island defaults, a clause typically not added to muni deals. They also are asking to be repaid ahead of the GDB.
The firms also want something known in the junk-bond world as a make-whole provision, according to two people with knowledge of the matter. So, if Puerto Rico decides to pay back the debt before maturity, the investors would get full payment with the future interest they would otherwise lose.
