The mysterious borrowing undertaken by the Puerto Rico Government Development Bank in the middle of December has been explained. The GDB issued a press release that said that it had “borrowed” $110 million from the state workers insurance fund:
Government Development Bank for Puerto Rico (GDB) Interim President José Pagán Beauchamp today confirmed the GDB’s placement of $110 million in Senior Guaranteed Notes with the Puerto Rico State Insurance Fund Corporation. The bonds have a coupon of 8 percent per annum and have maturities of $40 million, $30 million and $40 million on December 1, 2017, December 1, 2018 and December 1, 2019, respectively.
It looks like a desperate grasp for liquidity. The GDB, however, calls it a plus for the state workers insurance fund that it “borrowed” assets and improved its cash flow.
‘This transaction is a part of our previously announced strategy to bring Commonwealth deposits to the GDB,’ said Pagan. ‘It achieves two objectives simultaneously – increasing GDB’s liquidity and improving the cash flow of the State Insurance Fund. Combined with fiscal reforms recently signed into law that will strengthen the teachers’ pension system, today’s announcement reflects another step in improving the Commonwealth’s near-term economic situation and long-term economic outlook.’
The interest rate on this intergovernmental borrowing for 4, 5, and 6 year loans is 8 percent – extremely high. Here is how Puerto Rico said it would address its cash needs last October when it said it had sufficient liquidity through fiscal year 2014 (June 30):