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Unsecured Creditors inform court of extension to object procedures involving annulment of $6 billion of Puerto Rico debt

By on January 17, 2019

SAN JUAN – The Special Claims Committee of Puerto Rico Financial Oversight and Management Board and the Unsecured Creditors Committee have filed a motion informing the court that objectors to the procedures motion involving the board’s attempt to annul $6 billion in general obligation debt have agreed to extend the deadline to Jan. 25.

Judge Laura Taylor Swain last week gave parties objecting the Puerto Rico fiscal board’s request that $6 billion in general obligation debt be annulled until Jan. 21 to submit their objections to the procedures involving their asserted claims. But the UCC and the Board noted in a motion Monday, which was a holiday, that objectors -the  Ad Hoc Group of General Obligation Bondholders, the Ad Hoc Group of Constitutional Debt Holders, Assured Guaranty Corporation and Assured Guaranty Municipal Corporation and certain funds managed by Oppenheimer Funds- have agreed to extend to January 25 the deadline to comment on the procedures that will be followed in relation to the dispute over the $6 billion.   .

The judge also said any unresolved objections to the procedures motion, involving bond issuances in 2012 and 2014, will be heard during a Jan. 30 omnibus hearing. There are nine firms and hedge funds impacted by the decision because they invested more than $50 million in general obligation bonds that the Financial Oversight and Management Board said are illegal for having been issued in violation of constitutional debt limits. These firms include Aurelius Investment and Brigade Capital Management.

Assured Guaranty Municipal Corp., a monoline bond insurer, has publicly objected the fiscal  board’s request.

“Commonwealth’s Series 2012 A GO Bonds insured by Assured Guaranty Municipal Corp. were issued in full compliance with applicable provisions of the Puerto Rico Constitution and related laws, including the constitutional debt limitation provision, and we believe that they are legal, valid and binding obligations of the Commonwealth. In 2012, AGM insured $369 million of 2012 A GO refunding bonds while at the same time coming off risk on $532 million of GO bonds we had previously insured. The $369 million has been included in the amounts of Puerto Rico exposure we regularly disclose,” the company said.

Assured added that the objection is another example of the fiscal board continuing “to spend hundreds of millions of dollars on litigation and related expenses that run counter to the Oversight Board’s specifically legislated purpose: to achieve fiscal responsibility and capital markets access.”

“Once again, the Oversight Board is more willing to disrespect the rule of law and litigate rather than engage in meaningful negotiations to develop a realistic solution to the Commonwealth’s fiscal crisis,” the company further said.

The fiscal board’s Special Claims Committee announced last week that it and the Official Committee of Unsecured Creditors in Puerto Rico’s debt restructuring filed an objection in U.S. District Court 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 commonwealth’s Constitution and should be declared null and void, the board said in its press release.

The board and the Creditors’ Committee asked the judge overseeing Puerto Rico’s restructuring case to also disallow the claims of that debt under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa).

On Sept. 13, 2017, a board committee retained Kobre & Kim to review Puerto Rico’s debt and its connection to the island’s fiscal crisis. The 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 the process.

The objection says “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 by the board. In 2012, two issuances were made under former Gov. Luis Fortuño: one for $2.3 billion and another for $450 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 fiscal 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.”

Editor’s note: This report was corrected to reflect that the Jan. 25 deadline is to object the procedures, not the annulment.

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