Thursday, March 22, 2018

Transparency issues tarnish Puerto Rico bankruptcy process

By on March 8, 2018


(CB File)

Despite the passage of Promesa and the imposition of a Financial Oversight & Management Board to oversee commonwealth finances, the availability and quality of the government’s financial data continue to be a concern at all levels.

Last week, the Ad Hoc Group of Puerto Rico General Obligation (GO) bondholders, the Ad Hoc Group of Prepa (Puerto Rico Electric Power Authority) Bondholders, the Mutual Fund Group, Assured Guaranty Corp. and Assured Guaranty Municipal Corp., Ambac Assurance Corp. and Syncora Guarantee Inc. wrote to the governor urging him to make public the underlying supporting materials and analyses being shared with the island’s fiscal oversight board to evaluate the proposed fiscal plans. This was after the Puerto Rico Fiscal Agency & Financial Advisory Authority (Fafaa) had rejected the GO group’s request for disclosure while the plans were still being formulated. Still, the government in a reply denied it was withholding financial information from bondholders or stakeholders. The bondholders’ concerns are legitimate because the most recent fiscal plans do not allocate funding for payment of debt, and the creditors need to be able to understand why.

Since the commonwealth filed for bankruptcy under the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), it has insisted it seeks to remain transparent and share information on the island’s fiscal state. As a matter of fact, in a court-brokered proceeding, the right to do discovery is enforced by a judge. That right, however, is not unlimited. The parties cannot go on a fishing expedition but can only seek information that is relevant to the controversy. Certain materials, such as communications between lawyers and clients, are privileged. That is why Magistrate Judith Dein last week put a stop to efforts by specific bondholders to obtain certain communications between the commonwealth, Fafaa and its fiscal oversight board, as well as additional 2017 and 2018 fiscal plan development materials.

Even though government documents, including economic data, are public, the commonwealth as well as the Oversight Board, the latter of which is protected by the federal law Promesa, have been less than forthcoming in providing information. Just last week, the American Federation of State, County & Municipal Employees International Union (AFSCME), American Federation of Labor & Congress of Industrial Organizations (AFL-CIO), American Federation of Teachers, the United Automobile, Aerospace & Agricultural Implement Workers of America (better known as the United Automobile Workers [UAW]), Service Employees International Union (SEIU), on their own behalf, their local affiliates in Puerto Rico and other unions, sought discovery information on pensions to prove the government may be breaking the law in its handling of retirement funds.

The unions contend the government has failed to create individual defined-contribution accounts; has failed to appoint a new retirement board; and appears to be holding a single omnibus “Employee Withholding” account, containing not only $133 million of the “individual defined-contribution retirement account” money, but also other commingled assets, including loan repayments being made to the commonwealth.

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“Since July 1, 2017, when employees should have been able to invest their individual retirement accounts in low-cost index funds as stated in the March 2017 Fiscal Plan Certification, the S&P 500 has risen from 2,423.41 at market close on June 30, 2017, to 2,701.33 at market close on Feb. 21, 2018—an increase of 11.4 percent. As far as the commonwealth employees know, their mandatory contributions have essentially been hidden under a mattress by the commonwealth that entire time,” the unions say.

Ambac, which insures and owns billions in Sales Tax Financing Corp. (Cofina), GO and other bonds, has said it has sought to understand the commonwealth’s financial condition for years. In April and July of 2015, Ambac requested information regarding the financial condition of Cofina, the Highways & Transportation Authority (HTA), Infrastructure Financing Authority (Prifa or AFI by its Spanish acronym), and P.R. Convention Center District Authority (PRCCDA), in accordance with the contractual right to receive such information. The requests were ignored. The company sued HTA in 2016 and the court ordered the entity to provide information to Ambac. Although HTA promised to provide the documents, it engaged in delay tactics to benefit from Promesa, which was slated to be passed by Congress.

“By that time, however, it became clear that HTA’s strategy was to run out the clock on discovery while Promesa was pending in Congress. After Promesa was passed June 30, 2016, HTA promptly filed a notice of stay pursuant to the statute, precluding the relief Ambac would have almost certainly obtained in light of HTA’s representations to the court. This pattern of behavior continued into 2017, when Ambac requested information concerning the Fiscal Plan and the assumptions underlying it,” the company said.

Another instance of what appeared to be delay tactics and lack of transparency was when the Oversight Board may have been stonewalling a probe into the causes of the debt. Last year, the Committee of Unsecured Creditors asked Judge Laura Taylor Swain for a discovery order to ascertain the causes of Puerto Rico’s financial crisis. The Oversight Board at the time said it was going to complete its own probe into the financial crisis and the discovery was not needed. Swain deferred the decision to Magistrate Dein, who ruled that once the Oversight Board retains its researcher for the investigation it intends to undertake, she could confer with the Creditors’ Committee attorneys to determine whether they can agree that certain areas of investigation can either be allocated between them or coordinated among them. They were ordered to issue a report last September. The Oversight Board hired John Couriel of the Kobre & Kim law firm to conduct the investigation but as of September, Couriel only had a “working plan.”

An Interim Report, published Oct. 30, 2017, by the Oversight Board, said Couriel had indicated it would take 200 days to do the job.

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