Davis Polk is advising an ad hoc group of bondholders who hold approximately $935 million of bonds issued by the Government Development Bank of Puerto Rico (GDB), in a possible restructuring of approximately $3.7 billion of GDB debt. On May 2, 2016, GDB and the Ad Hoc Group announced that they have reached agreement on indicative terms of a proposed restructuring of their holdings, subject to the negotiation of remaining terms and conditions. This agreement was reached on the eve of GDB’s default of approximately $370 million of principal payments, which is the Commonwealth of Puerto Rico’s largest default to date in connection with its outstanding public debt of over $72 billion.

The indicative terms contemplate a two-step restructuring, with an initial exchange in which existing GDB bonds held by members of the Ad Hoc Group would be exchanged for GDB notes with a face amount of 56.25% of the face amount of their original GDB bonds, which new notes will be secured by a first priority lien on certain municipal loans. The second step contemplates that if a qualifying global exchange is consummated, the Ad Hoc Group would exchange the GDB notes received in the initial exchange for consideration with an agreed value of 47% of the face amount of their original GDB bonds. 

Relatedly, Davis Polk also filed a complaint in the United States District Court for the District of Puerto Rico on behalf of certain affiliates of members of the Ad Hoc Group seeking to preserve GDB’s assets and protect the rights of GDB’s bondholders. The parties have agreed to extensions of deadlines to file pleadings in the litigation pending negotiation of definitive documentation.

GDB is a public corporation and government instrumentality of the Commonwealth of Puerto Rico, which acts as financial adviser to and fiscal agent for the Commonwealth and its instrumentalities, public corporations and municipalities. GDB also provides interim and long-term financing to the Commonwealth and its instrumentalities, public corporations and municipalities, and to private parties for economic development.

The members of the Ad Hoc Group are funds managed or advised by Avenue Capital Management II, L.P., Brigade Capital Management, LP, Claren Road Asset Management, LLC, Fore Research & Management, LP and Solus Alternative Asset Management LP. 

The Davis Polk insolvency and restructuring team includes partners Donald S. Bernstein and Brian M. Resnick, associates Angela M. Libby and Rebecca Van Derlaske. The litigation team includes partner Benjamin S. Kaminetzky and associates Marc J. Tobak and Abhi Raghunathan. The capital markets team includes partner Nicholas A. Kronfeld and counsel Derek Dostal. Partner Lawrence E. Wieman is providing credit advice. All members of the Davis Polk team are based in the New York office.

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