Fiscal board, Creditors Committee challenge $6 billion of Puerto Rico’s debt

SAN JUAN – The Special Claims Committee of the Financial Oversight Board for Puerto Rico announced late Monday that it and the Official Committee of Unsecured Creditors in Puerto Rico’s debt restructuring have filed an objection to more than $6 billion of Puerto Rico’s bonded debt.

The objection asserts that the so-called “invalid debt” was issued in “clear violation” of the Puerto Rico Constitution and should be declared null and void, the fiscal board said in its press release. 

The board and Creditors’ Committee have asked the federal judge who is overseeing Puerto Rico’s restructuring case to declare the invalid debt null and void, and to disallow the claims of that debt under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa).

May is the deadline for avoidance of claims in the Title III case.

On Sept. 13, 2017, a committee of the board retained Kobre & Kim as an independent investigation team to carry out a review of Puerto Rico’s debt and its connection to the island’s fiscal crisis. The special committee described the investigation as “an integral part of the Board’s mission to restore fiscal balance and economic opportunity and to promote Puerto Rico’s reentry into the capital markets.”

After Kobre & Kim released its 600-page report on Aug. 20, 2018, the board appointed a Special Claims Committee consisting of board members Andrew Biggs, Arthur González, Ana Matosantos and David Skeel to investigate potential claims arising from the firm’s report. The claims committee retained Brown Rudnick LLP to assist in this process.

Monday’s objection, which the board said is its “first major action” taken as a result of its investigation, involves its and the Creditors’ Committee identifying “more than $6 billion of Invalid Debt as exceeding the debt limit in Article VI, section 2 of Puerto Rico’s Constitution.”

All general obligation bonds, which are backed by the full faith and credit of Puerto Rico, issued by Puerto Rico in 2012 and 2014 are considered invalid debt. In 2012, two issuances were made under former Gov. Luis Fortuño: one for $2.3 billion and another for $17 million. In 2014, $3.5 billion was issued in GO bonds under the administration of former Gov. Alejandro García Padilla.

The Creditors’ Committee also alleges that the “Invalid Debt violates the balanced budget requirement in Article VI, section 7 of the Puerto Rico Constitution, because proceeds of the debt were used to finance deficit spending,” according to the release.

The Creditors’ Committee is represented by Paul Hastings LLP as counsel and Zolfo Cooper LLC as its financial adviser.

The board acknowledged it “is mindful of the extraordinary responsibility it has been given under PROMESA. As the representatives of Puerto Rico in the Title III restructuring, the Board has the duty to act in the best interests of Puerto Rico and all of its creditors. Challenging improperly issued debt is consistent with that duty.”

Independent investigator: Flaws in constitutional limits led to Puerto Rico’s $74 billion debt

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