Tuesday, April 7, 2020

Fiscal Board to Submit Disclosure Statement on Puerto Rico Plan Support Agreement As Opponents Raise Issues

By on February 25, 2020

SAN JUAN – On Friday, Puerto Rico’s Financial Oversight & Management Board will submit to the court a disclosure statement and plan support agreement (PSA) that proposes a global settlement on certain central government debt.

Afterward, the board has said it intends to move forward with the plan’s confirmation, which according to a mediation team report should occur by October or before the general elections in November.

The PSA, which would restructure some $35 billion in debt, is expected to settle issues related to general obligation (GO) and Public Buildings Authority (PBA) bonds, disputes related to Puerto Rico Infrastructure Financing Authority (Prifa, or AFI by its Spanish acronym) bonds and the bonds’ priority.

The PSA will follow a schedule proposed in a mediation team report that was issued Feb. 10 and is supported by the board and the parties in the PSA, including the Ad Hoc Group of Constitutional Debt Holders, the Ad Hoc Group of General Obligation Bondholders, the Lawful Constitutional Debt Coalition and the QTCB Noteholder Group.

Among the mediation team report’s recommendations is a stay on litigation related to the validity and priority of the GO, PBA and Prifa bonds. The report also proposed a schedule to move forward issues related to Employees Retirement System (ERS) claims.

However, last week the board proposed amendments to the mediation team, including a stay on 18 adversary proceedings as well as nine motions consisting mostly of objections to claims asserted by GO and PBA holders.

In its report, the mediation team said that if the court decides that defendants in four revenue bond adversary proceedings—three of which object to claims against the commonwealth and a fourth with claims against the Puerto Rico Highways & Transportation Authority (PRHTA)—have no security or property interest in the relevant revenues, it will have to determine whether they have unsecured claims against the commonwealth related to those revenues.

The board said it supports limiting the summary judgment in the adversary proceedings to the question of whether there were violations of the contracts’ clause held by the parties. The remaining issues can be handled through the meet and confer process.

However, bond insurers Assured Guaranty Corp., Assured Guaranty Municipal Corp., National Public Finance Guarantee Corp., Ambac Assurance Corp. and Financial Guaranty Insurance Co. have come out against the report, arguing that “only certain parties” in crucial phases of the mediation were included and that the processes contained in the report seek to force a debt restructuring deal on them without their consent.

The monoline bond insurers said the proposed stay on all GO and PBA litigation violates their rights and is aimed at making them accept a deal they oppose.

“The abrupt change of course reflected in the amended report purportedly aims to confirm a commonwealth plan before the next election this fall. But the current governor of Puerto Rico does not even support the new plan, making it unclear why either the mediation team or [the] FOMB believes the plan could be confirmed under the current administration, much less why they think there is any particular urgency to holding a confirmation hearing before the election,” the monolines said.

One of the insurers’ point of contention is the plan is unconfirmable. Under the new debt agreement, commonwealth creditors would receive $10.7 billion in new debt, half in GO bonds and half in  Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) junior lien bonds, which will be created, as well as $3.8 billion in cash.

The insurers say Section 314 of the federal Puerto Rico Oversight, Management and Economic Stability Act (Promesa) provides that a plan may only be confirmed if “the debtor is not prohibited by law from taking any action necessary to carry out the plan.” They say the amended PSA would violate that requirement, because it will require the commonwealth to transfer to Cofina the “Commonwealth Share” of the sales and use tax (IVU by its Spanish acronym), which was decided as part of the Cofina debt deal.

Accordingly, neither Cofina nor its bondholders have any claim to the commonwealth portion of the IVU.

“By purporting to require the commonwealth to transfer the commonwealth Portion to Cofina, the Amended Plan would therefore result in a massive fraudulent transfer of commonwealth property to Cofina’s existing first-lien bondholders, who as a result of that transfer would receive a first-lien on billions of dollars of additional collateral in exchange for absolutely no consideration,” the insurers said.

They say a suggestion by the mediation team that would prevent bond insurers from seeking a trustee to pursue PRHTA avoidance claims against the commonwealth, as well as a recommendation to deny Ambac’s request for discovery concerning the use of AFI rum taxes, is illegal.

National specifically said the GO/PBA litigation should not be stayed because there are important issues that should be resolved, such as challenges to the validity of certain bonds, challenges to asserted liens and several adversary proceedings.

“In fact, the new proposed plan of adjustment would allocate significant value to recently issued GO bonds—the same bonds that the FOMB, in litigation, vehemently contends are invalid. That contention should be litigated sooner rather than later,” National said.

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