Puerto Rico hedge fund squeezing out commonwealth's second-largest municipality; other municipalities in similar pickle

05 September 2018
 
Midtown Acquisitions, an affiliate of hedge fund Davidson Kempner, is demanding full payment of a loan that the Puerto Rico municipality of Bayamon cannot pay, according to documents seen by Debtwire Municipals and Bayamon’s deputy mayor.
 
Midtown and Bayamon officially signed on to a three-month forbearance agreement this July after the municipality disclosed that it would not be able to pay the loan in full on its maturity date of 1 July 2018.
 
When it comes to population, Bayamon ranks second among Puerto Rico’s 78 municipalities.
 
Davidson Kempner, meanwhile, is among the most heavily invested hedge funds in Puerto Rico, with north of USD 300m in the commonwealth’s constitutional debt, according to disclosures made in Puerto Rico’s Title III bankruptcy proceedings.
 
The troubled loan traces back to 2013, when Oriental Bank extended a USD 45m credit agreement to Bayamon, according to the documents reviewed by Debtwire Municipals.
 
The agreement was then-signed by Ramon Luis Rivera, who still serves as mayor of Bayamon, and then-executive vice president of Oriental Bank, Jose Ramon Gonzalez. Today, Ramon Gonzalez is one of the seven voting members of the Financial Oversight and Management Board (FOMB).
 
The credit agreement was made manifest through the issuance of four separate series of general obligation (GO) refunding notes coming due 1 July 2018 and backed by the full faith and credit of Bayamon.
 
The notes were structured as ballooning obligations, with USD 33.1m of the USD 45m principal due at maturity date.
 
Yet on 1 July of this year, Bayamon was unable to meet the balloon payments and signed a three-month forbearance agreement with the new owner of the loan, Midtown Acquisitions, according to the documents reviewed by Debtwire Municipals.
 
Oriental sold the Bayamon loan to Midtown on 30 June 2017. By maturity date this year, Bayamon owed a total of USD 34m on the USD 45m credit agreement, comprising of USD 33.1m of principal and roughly USD 900,000 of accrued, unpaid interest.
 
Sidestepping a brick wall
 
Midtown is demanding that the loan be paid in full, Bayamon deputy mayor Rurico Pintado Cruz told Debtwire Municipals.
 
“The municipality had a verbal agreement with Oriental Bank that it would need to refinance the loan when it came due this year,” said Pintado Cruz, who signed the three-month forbearance agreement with Midtown as acting mayor of Bayamon. 
 
“Yet Oriental sold the loan [to Midtown] without our knowledge and when the due date came we suddenly faced very different terms,” he added.
 
Neither Midtown—through its affiliate Davidson Kempner—nor Oriental returned calls for comment on the matter.
 
The forbearance agreement highlights that any efforts to refinance the loan would require approval of the Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA).
 
Via a written statement, FAFAA confirmed to Debtwire Municipals that it is indeed apprised of Bayamon’s situation and is assisting the municipality to reach a positive resolution. When asked about the negotiation process and specific refinancing terms, FAFAA declined to comment.
 
Rurico Pintado also declined to offer specifics but did disclose that the law firm representing Midtown is Quiñones, Arbona & Candelario.
 
He also pointed out that the debt on the loan is now closer to USD 30m because the municipality had to give Midtown an upfront payment of roughly USD 4m to sign the forbearance agreement.
 
Like so many other municipalities, Bayamon’s liquidity has been constrained by the devastating impact of Hurricane Maria, and that is why Bayamon is currently in search of better refinancing terms with other institutions, Rurico Pintado said.
 
The municipality’s plan is to borrow some USD 15m from other institutions and pair it with a surplus USD 15m to pay Midtown the full USD 30m owed on the loan.
 
“Bayamon is up to date on all its other obligations and is waiting for reimbursements from FEMA [Federal Emergency Management Agency] and insurance companies,” said Rurico Pintado. “Those have been really slow to come.”
 
Bayamon’s claims to FEMA amount to a little over USD 26m, yet FEMA has only disbursed USD 5m thus far, according to data furnished by Bayamon’s spokesperson Migdalia Rivera. Bayamon also has claims totaling around USD 30m but only USD 5.8m have been paid to date.
 
Connections to GDB, other municipalities
 
The four GO issuances that comprise Bayamon’s Midtown loan are reflected on page 59 of the municipality’s FY17 audited financial statements, the latest available. Bayamon’s bonded debt outstanding then totaled USD 223.8m, including the Midtown notes, and its general fund budget was close to USD 113m.
 
That year, Bayamon’s restricted cash in the debt service fund amounted to USD 25.3m, according to the audited financials.
 
Yet Bayamon isn’t the only large municipality that was unable to meet balloon payments on 1 July, according to a disclaimer included in the Government Development Bank of Puerto Rico’s (GDB) solicitation for a consensual restructuring under Title VI of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).
 
Buried in the hundreds of pages that comprise the solicitation statement, a paragraph notes that Bayamon, Caguas, Carolina, and Fajardo all had balloon payments due on 1 July 2018 on their municipal GOs with private financial institutions.
Carolina is the third-most populous municipality in Puerto Rico. Caguas ranks fifth and Fajardo comes in at number forty.
 
 
Those municipalities’ “starting balances in the GO redemption fund in FY18, combined with their estimated special additional tax collections during FY18, were not sufficient to pay all contractual debt service (including the balloon payments)…” the GDB solicitation statement reads.
 
“However, such balloon payments are in the process of being refinanced and, in certain cases, their maturity dates were extended for a short period pending such refinancing,” the statement adds.
 
In the case of Bayamon, the municipality is in advanced conversations with at least two local private institutions that would provide the financing needed to close out the Midtown loan, a source close to the matter told Debtwire Municipals.
 
Rurico Pintado declined to name names but did confirm that Bayamon is already in advanced negotiations with local entities.
 
The deputy mayor also said that because Bayamon would be engaging in new financing with other entities, it had to disclose the information to FAFAA and FAFAA would in turn communicate with the FOMB, pursuant to PROMESA.
 
It’s unclear whether FAFAA has apprised the FOMB of the matter. Neither agency returned calls for comment.
 
by Javier Balmaceda