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Hedge Clippers: Puerto Rico debt restructuring agreement could block accountability for key officials, bankers

By on August 22, 2018

SAN JUAN – A report published Wednesday warns that the Government Development Bank’s (GDB) debt restructuring agreement could prevent holding certain government officials and bankers legally accountable for the creation of the debt – “and stick credit unions and municipalities with the tab.”

The GDB’s restructuring agreement for $4 billion was negotiated by “revolving door figures who were previously officials at the GDB, have played some oversight role with respect to the debt, and/or have close ties to financial institutions that have profited from debt issuances over the years,” reads the paper written by Hedge Clippers, a group that advocates for income equality by targeting hedge and private equity funds.

The agreement is now in the voting stage, and will need to secure votes from two-thirds of GDB creditors but once it is final, it will block legal actions against officials and institutions that “oversaw and profited” from Puerto Rico’s debt, Hedge Clippers said.

“One of these revolving door bankers was Gerardo Portela, Governor [Ricardo] Ricardo Rosselló’s lead representative in negotiating the agreement. Until July, Portela was executive director of Puerto Rico’s fiscal agency (AAFAF) and was formerly an executive with oversight of public finance deals at Santander, a bank which profited heavily from the creation of the debt. Rosselló removed Portela from his position in July, creating the appearance of distance between this conflicted network and the final deal,” Hedge Clippers said. Christian Sobrino was named head of the Fiscal Agency and Financial Advisory Authority while Portela was appointed chief investment officer on July 31.

Puerto Rico’s credit unions and municipalities are key parties to the agreement, and many will need to vote in favor for it to go through. The restructuring “could result in significant financial damage to both,” Hedge Clippers said, adding that, credit unions, which invested in Puerto Rico’s debt, “will give up their ability to secure valuable financial damages that could outstrip their recoveries. The solicitation statement for the agreement warns bondholders of this risk.”

Municipalities will face major financial consequences if the agreement goes through, according to the report. “They will be required to provide the majority of the payment stream that the refinanced bonds will depend on: payments on GDB loans, which are largely sourced from property and sales taxes. These loans have not been written down substantially, unlike the GDB bonds. As they face growing deficits, hurricane recovery costs, and funding cuts, municipalities will likely struggle to meet these obligations, and tax hikes, more aggressive collections, layoffs, privatizations, and support from the Commonwealth could result,” Hedge Clippers wrote.

However, most mayors support the agreement.

The agreement provides for a 55% recovery on existing GDB bonds, a significant haircut for early investors in the debt like credit unions.

“On the other hand, hedge fund speculators that purchased the debt at low prices could secure massive profits (some GDB bond prices have more than tripled since March 2017, before the first Restructuring Support Agreement, RSA, was announced). These profits are, however, far from certain, as long as investors do not sell out of their positions. Notably, the bond document warns that investors should not expect to receive full payment on the new bonds’ principal and interest, given insufficient underlying payment streams,” the paper reads.

However, once the restructuring deal closes, the GDB and its officials, as well as other “agents or representatives” of the GDB – which could include banks, law firms, and other outside parties – “will be shielded from civil legal action brought by Puerto Rico government authorities,” the report continued, “due to a little-noticed article in the GDB Debt Restructuring Act of 2017. The law could be interpreted to apply not only to GDB-issued debt, but all GDB actions.”

The legal releases are broad, and block many forms of legal action with respect to not just the GDB and creditors, but also their current and former officers and directors, the report said.

“Taken together, these releases are especially significant because they shut down important paths to legal accountability: credit unions and government institutions are among the few entities in Puerto Rico with standing to bring civil claims against those involved in creating and issuing the debt,” Hedge Clippers said.

The group noted that Portela oversaw much of the debt restructuring and is responsible for the legal releases. Jorge Irizarry, a former GDB president, also participated in the negotiations as executive director of Bonistas del Patio. “As GDB president in 2007-2008, he authorized three disastrous Employees Retirement System bond issues,” the report says.

Paul Hopgood, a former Santander executive, is advising two credit union coalitions that are parties to the deal, which still requires court approval.

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