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GDB Bondholders File Amended Complaint

By on May 20, 2016

SAN JUAN – Holders of bonds issued by the Government Development Bank for Puerto Rico (GDB) on Friday filed an amended complaint in the U.S. District Court in San Juan challenging the constitutionality of certain aspects of the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, known as the Moratorium Act, and certain executive orders.

In this April 30, 2015, photo, Puerto Rico Gov. Alejandro García Padilla delivers his budget address for the next fiscal year at the Capitol building in San Juan. (AP Photo/Ricardo Arduengo, File)

In this April 30, 2015, photo, Gov. Alejandro García Padilla delivers his budget address at the Capitol in San Juan. (AP Photo/Ricardo Arduengo, File)

Gov. Alejandro García Padilla said the lawsuit’s challenge of the Debt Moratorium and Financial Recovery Act could affect the commonwealth’s ability to have police in the streets, teachers in the classrooms and nurses in hospitals. He said because Congress excluded Puerto Rico from the bankruptcy code in 1984 without any explanation, and the federal courts have impeded past attempts to create a local bankruptcy law, the act is the commonwealth’s only option to restructure its debt.

“If the commonwealth cannot proceed with its intention to restructure the debt in an organized manner, chaotic litigation will ensue and the courts can take control of the limited resources of the government and make them available to the interests of the Wall street funds,” the governor said in a written statement Saturday evening. “We are not going to close the government to pay a considerable profit to the hedge funds, who bought the bonds at a big discount after the crisis began.”

The Ad Hoc Group behind the lawsuit comprises five investment funds that hold $900 million of the GDB’s nearly $4 billion in outstanding debt.

Earlier this month, members of the Ad Hoc Group of GDB bondholders, including the plaintiffs, announced an agreement with the bank on indicative terms of a proposed restructuring, subject to negotiation of certain terms and conditions. The Ad Hoc Group continued to negotiate with GDB toward definitive documentation.

Accordingly, and while negotiations continued, the Ad Hoc Group continued to forbear from exercising legal remedies with respect to defaults by the GDB in connection with the principal payments due May 1.     

The Government Development Bank for Puerto Rico

“In an unexpected and unfortunate development, shortly after the indicative terms were announced, Law 40 was enacted amending the Moratorium Act to change the status quo by prioritizing the rights of certain GDB creditors over others…. While plaintiffs, as members of the Ad Hoc Group, expect to continue constructive restructuring negotiations with GDB and other bondholders, in the interest of their investors, they have no choice but to challenge as null and void the provisions of the Moratorium Act, as amended, that purport to retroactively alter the parties’ rights,” the group said in a statement.    

The plaintiffs allege in the amended complaint, among other things, that certain provisions of the Moratorium Act violate the U.S. Constitution and the Puerto Rico Constitution by impairing “bargained-for rights, by depriving a subset of creditors of property for the benefit of the commonwealth without just compensation,” and by providing for preferential treatment of certain creditors in a “facially discriminatory manner.”

The plaintiffs also allege that certain provisions of the Moratorium Act conflict with and are preempted by the federal Bankruptcy Code, and unconstitutionally bar suit in federal court.

Notwithstanding the commonwealth’s unconstitutional actions, the members of the Ad Hoc Group said they understand that the commonwealth faces significant challenges and want to continue working with the GDB, as they have “for over a year, to achieve a fair, equitable, and mutually beneficial restructuring,” the group’s statement reads.

The  plaintiffs are funds managed or advised by Brigade Capital Management LP, Claren Road Asset Management LLC, Fir Tree Partners LP, Fore Research & Management LP and Solus Alternative Asset Management LP. All of the plaintiffs except Fir Tree Partners are represented by Davis Polk & Wardwell LLP and Vicente & Cuebas, as legal counsel, and by Ducera Partners as financial adviser; Fir Tree is represented by Robinson McDonald & Canna LLP and Vicente & Cuebas, as legal counsel, and by Ducera Partners, as financial adviser.

The GDB defaulted on the bulk of a $423 million payment due May 1, but also announced a tentative debt-restructuring deal with the group that would offer it a recovery rate of about 50 cents on the dollar.

Other creditors are also challenging an executive order issued this year by Gov. Alejandro García Padilla to “claw back” revenue supporting different bonds and use the money for to pay for essential services and government debt obligations.

And this month, bond insurer Ambac Assurance Corp. filed suit to seek the appointment of a receiver at the Puerto Rico Highways & Transportation Authority, charging that the government was illegally taking money from the public corporation to pay for other debts.

Puerto Rico officials say that because Puerto Rico is barred from reorganizing debts under a bankruptcy framework, they have no choice but to use the new law to declare debt moratoriums to maintain essential public services.

The House Committee on Natural Resources will hold a markup session next Tuesday and Wednesday on legislation to address Puerto Rico’s fiscal crisis. The measure would create an oversight board to ensure that Puerto Rico begins running balanced budgets and would also have the power to authorize the restructuring of existing debt.

The U.S. Supreme Court is also reviewing decisions that overturned the local bankruptcy law.

The Associated Press contributed to this report.

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