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People walk past a vacant building for lease on May 8, 2017 in San Juan, Puerto Rico. The country is struggling under a mountain of debt. (MARK RALSTON/AFP/Getty Images)
People walk past a vacant building for lease on May 8, 2017 in San Juan, Puerto Rico. The country is struggling under a mountain of debt. (MARK RALSTON/AFP/Getty Images)

Puerto Rico government bank reaches wind-down deal with creditors Add to ...

Debt-laden Puerto Rico announced on Monday that the Government Development Bank, once the primary fiscal agent for the U.S. territory, has reached a liquidation deal with its creditors, avoiding a protracted bankruptcy.

The agreement would be executed through a so-called Title VI proceeding under PROMESA, the federal rescue law for Puerto Rico, according to a statement from Governor Ricardo Rossello’s office. That would avoid a Title III bankruptcy.

GDB’s assets will be split into two separate entities, according to a term sheet made public on Monday.

The first, holding $5.3-billion of the bank’s assets, would issue three tranches of debt with different protections in exchange for varying principal reductions. Beneficiaries would include municipal depositors and bondholders like Avenue Capital Management, Brigade Capital Management, and Fir Tree Partners.

The second entity, funded with public entity loans and $50-million of cash, would benefit all other depositors.

GDB is a microcosm of Puerto Rico’s historic economic crisis, which is characterized by an untenable debt load of $70-billion, a 45 per cent poverty rate, and near-insolvent public health and pension systems.

Puerto Rico’s government as well as its sales tax authority, COFINA, are in bankruptcy under Title III of PROMESA, with initial court hearings scheduled for Wednesday in San Juan. Other island agencies are undergoing debt restructurings out of court.

GDB’s plan represents an end to what was once the equivalent of a central bank in charge of holding deposits from government agencies and municipalities.

Puerto Rico’s federal financial oversight board last month approved a plan to wind down the bank, which had been a shell entity since the island’s former governor declared a state of emergency in April 2016. GDB defaulted on $422 million of debt the following month.

“This agreement is an example of the government regaining the credibility it had lost over the past few years,” Rossello said in the statement on Monday.

Bradley Meyer, a financial adviser to a key group of bondholders, said the group “looks forward to the final documentation and fast implementation of the deal.”

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