Friday, September 22, 2017

[Analysis] Puerto Rico government, its creditors begin mediation process



By on July 12, 2017

SAN JUAN — Representatives of the Puerto Rico government, the island’s financial control board and major creditor groups kicked off Wednesday their court-ordered mediation process with an introductory meeting in the Ceremonial Courtroom of New York’s southern district court.

More than 20 groups were on the guest list, including general obligation (GO) and Sales Tax Financing Corp. (Cofina by its Spanish acronym) bondholders, mutual funds, labor unions, retirees and other commonwealth creditors. More recently, creditors of the P.R. Electric Power Authority (Prepa) were convened to participate following the utility’s bankruptcy filing after a two-year-old, consensual restructuring agreement fell apart.

“[Mediation] is positive; it is a step forward. We feel comfortable and we want to push the [Gov. Ricardo Rosselló] administration’s goal of negotiating in good faith and strike consensual deals, even if it is under [Promesa’s] Title III [bankruptcy process],” Financial Advisory & Fiscal Agency Authority Director Gerardo Portela told Caribbean Business earlier this week.

Some creditor groups have a more pessimistic take on the process. “Mediation is not a panacea,” recently said Houlihan Lokey’s Stephen Spencer, whose clients include a group of mutual funds that own both GO and sales tax-backed debt.

During a June 28 hearing, federal District Judge Laura Taylor Swain—in charge of the island’s bankruptcy cases—said she hopes that the team of five judges appointed to oversee confidential talks between the commonwealth and its creditors, “will put negotiations in a more productive tract.”

Judge Barbara Houser—who leads the mediation team designated by Judge Swain—acknowledged during the June 28 hearing that although not every mediation ends successfully, “common ground is often identified.”

The Texas district judge went on to explain that the team seeks to facilitate ideas on how things could get resolved, evaluate the parties’ positions and identify their strengths and weaknesses. By combining all these components, chances improve for striking consensual or “substantially consensual” resolutions in Puerto Rico’s novel and complex bankruptcy, she said.

Thorny issues

A long list of contentious issues—some of which trace back to the very onset of the island’s debt crisis—decreases the odds of out-of-court agreements. This ranges from the validity of the commonwealth’s certified fiscal plan and budget, to the legality of the sales-tax-backed Cofina debt structure and whether adequate protection must be granted to certain creditors whose pledged revenue streams are being redirected or “clawed back.”

For political analyst and bankruptcy attorney, John Mudd, the mediation process would not produce material results until Judge Swain decides some of these key disputes.

“This is unlike Detroit, where the judge stopped everything and didn’t decide until parties mediated. In this case, it is the opposite because Promesa requires it so. [Judge Swain] has to decide quickly and I believe she is doing so,” Mudd told Caribbean Business.

From some in the creditors’ camps, the success of mediation would also depend on the commonwealth’s willingness to let go of certain bones of contention.

The Charging Bull statue in Lower Broadway in New York. (Juan J. Rodríguez / CB)

“Mediation will not be successful unless there is greater transparency, accountability, fiscal responsibility in the plan that the commonwealth and the oversight board put forward. If they don’t come clean, then it is not a reasonable basis for dialogue with creditors,” Spencer stressed during a recent panel in New York City on the island’s fiscal crisis.

Also present during the event was Jorge Gana, a managing director at bond insurer Assured Guaranty, who said he sees a “pathway for a very successful mediation”—if the commonwealth’s fiscal plan and budget are on the negotiating table.

“If instead it is simply to take the efforts thus far that…are not compliant with the law, and ask us to mediate divvying up those crumbs left at the bottom, then it’s incredibly difficult to see [mediation] being successful,” said the official at Assured, which insures several commonwealth credits.

This is not the first time the commonwealth and its creditors are trying mediation to hash out disputes. In April, as a May 1 deadline on the expiration of Promesa’s stay loomed, the island’s financial control board tapped former bankruptcy Judge Allan Gropper as a mediator in talks between the commonwealth and certain major creditor groups.

Logistics issues, impasses on key disputes and a game of “chicken” over the eventual filing of bankruptcy cases once the stay ended, were some of the setbacks that left parties nowhere near consensual solutions.

This time around, Judge Houser believes with “cooperation, ingenuity and diligence,” along with trust, consensual or “substantially consensual” solutions to Puerto Rico’s debt saga could be achieved.

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