Tuesday, June 19, 2018

[Editorial] In debt restructuring…there will be no deal before it is time

By on May 18, 2018

Editor’s note: This editorial originally appeared in the May 17-23, 2018, issue of Caribbean Business.

There was a time many moons ago—before the United States had the Napa Valley cred of stellar Cabs, Pinots and Petite Syrahs—when advertising geniuses on Madison Avenue were tasked with selling run-of-the-mill wine to the masses for the Gallo Winery. The “Madmen” put faces on the owners—brothers Ernest and Julio—who, according to the ad campaign, had the saying: “There will be no wine before it’s time.” The Gallo brothers sold barrels of bad wine to multitudes across America.

As pertains to Puerto Rico’s debt crisis, the slogan is not as catchy—“There will be no deal before it is time,” just doesn’t have the same ring to it and the brothers, indivisible under Territorial law, Gov. Ricardo Rosselló and Financial Oversight & Management Board (FOMB) Chairman José Carrion III do not have the same appeal among the masses. Even cheap wine is more popular than debt restructuring.

The deal fermenting this time is the recently released General Obligation (GO) and Cofina Bondholders Settlement made public at the crack of dawn early this week. No sooner had the blowout documents hit the street than Gov. Rosselló’s restructuring brigades were firing off their first salvo—a press release, all lawyered up, rejecting the deal—that went out with Tomahawk missile speed.

Those in the know, say the legal minds at Proskauer Rose, a legal firm making a mint according to the Fee Examiner’s report mandated by the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), helped prompt the Puerto Rico Fiscal Agency & Financial Advisory Authority’s (Fafaa) swift public denouncement. In the process, the Rosselló administration’s financial field generals helped to quell the rally of GO and Cofina bonds, which spiked in value by over 10 percent.

With the Rosselló administration’s denouncement of the deal as “unsustainable” came a lukewarm “non-endorsement, endorsement”—something like an “E” for Effort—by the territorial control board that read something like this: “The economic terms of this creditor proposal were not crafted with any prior input from either the oversight board or the government and are completely unaffordable.”

Although the response by those Siamese twins joined at the debt came as no surprise, Bettina M. Whyte, who is the agent appointed for Cofina, issued a statement in response to a press release by the counsel to the Ad Hoc Group of GO Bondholders denouncing the accuracy of the statement “that the Cofina agent supported the allocation of the pledged Sales Tax between the Commonwealth and Cofina in a proposed settlement of the Commonwealth-Cofina dispute.” Whyte punctuates her statement with this: “The Cofina agent neither endorsed nor rejected the proposed settlement. Additionally, the Cofina Agent specifically advised counsel to the Ad Hoc Group of GO Bondholders that any characterization of the Cofina Agent’s position in favor of the proposed settlement was neither authorized nor accurate.” Promesa brings with it so many truths stranger than fiction.

One need only read the footnotes in the Outline for the Joint Settlement to understand the extreme frailty of this deal. Some of the objections in the footnotes are from Cofina bondholders, namely hedge funds. For instance, GoldenTree Asset Management LP (on behalf of its participating clients) supports the deal except with respect to the allocation of the distributable value between and among Cofina bondholders. Would it surprise anyone to know that many of these hedge funds have more lawyers on staff than analysts?

To say there are hurdles to the settlement would be an understatement. The bottom line is that the FOMB must agree to the settlement to incorporate it into their plan of adjustment. Small detail.

If nothing else, the deal is important because it brought together two of Puerto Rico’s most important creditor constituencies, who have been fighting like the Hatfields and McCoys in the Ozarks of Hato Rey. One Wall Street source, who spoke to Caribbean Business on the condition of anonymity, put it best when he said: “This is like a game of poker, where for the first time those two creditor groups are showing their cards—what level of haircuts they are willing to take. Now we have a starting point….”

Importantly, it took the principals talking to each other to achieve a bare minimum consensus—probably not enough to close a deal but the beginning of negotiations essential to keep a very expensive legal tab in check.

It shows the art of the possible when you take the lawyers out of the room. The quicker all sides realize this, the better it will be for Puerto Rico and our people.

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