Tuesday, September 21, 2021

Judge Swain Issues Preliminary Backing of POA Disclosure Statement

By on July 14, 2021

FOMB Yet to Conclude Talks with Insurers Objecting Document 

SAN JUAN – After two days of hearings on the disclosure statement detailing the amended plan of adjustment (POA), U.S. District Court Judge Laura Taylor Swain issued a preliminary ruling Wednesday rejecting creditor objections to the document filed by Puerto Rico’s Financial Oversight and Management Board (FOMB), but delaying a final approval until the fiscal panel and insurers conclude negotiations. 

The hearings analyzed whether the disclosure statement provides accurate information to creditors, retirees, public employees, contractors and other parties who will be affected by the POA, which would restructure approximately $35 billion in commonwealth debt and $50 billion in pension liabilities, and include an 8.5 percent cut to monthly retirement payments. 

The deal reduces the outstanding general obligation (GO) and Public Buildings Authority (PBA) debt as well as other claims by almost 80 percent, from $35 billion to $7.4 billion in new GO debt that would be issued by the commonwealth government. The government’s debt service would be $1.15 billion, or 8 percent of fiscal year 2020 own-source revenues. 

The oversight board had requested time to complete negotiations involving objections made by bond insurers Ambac Assurance and Financial Guaranty Insurance Co. to the disclosure statement. Judge Swain set the next hearing for July 27 to finalize discussion of the disclosure statement with the expected FOMB agreement with insurers. 

In fact, the fiscal panel announced Wednesday that it had entered into an amended plan support agreement (PSA) with GO and PBA bondholders. In a press release, the FOMB said the amended agreement “allows for all applicable parties who join the agreement to receive the PSA Restriction Fee, which will be 1.321% of claims.”  

“To receive the fee, non-retail creditors will be required to tender their holdings into an exchange and receive a bond with an alternative CUSIP [Committee on Uniform Securities Identification Procedures] designating their joinder to the agreement,” the release reads. “GO or PBA bonds that are held by or insured by monoline insurers need not be tendered and exchanged. Retail holders owning less than $1 million in bonds may elect to be part of a separate retail class and receive an identical fee.”  

The oversight board said the new agreement eliminates the debt service reserve fund created pursuant to the issuance of new GO bonds as part of the prior agreement, but that it keeps the contingent value instrument (CVI), which would pay an additional amount to bondholders if collections of the 5.5 percent portion of the commonwealth’s 11.5 percent sales and use tax (SUT, or IVU by its Spanish acronym) pledged to the Puerto Rico Sales Tax Financing Corp. (Cofina) exceeds estimates.  

Judge Swain’s Wednesday ruling opens the door to the POA confirmation process, including voting by dozens of classes of creditors, as established by the federal Puerto Rico Oversight, Management and Economic Stability Act of 2016 (Promesa)—which provides Chapter 9-bankruptcy-like provisions for the island, such as its Title III, and created the oversight board to restructure the island’s debt. In fact, the judge overruled objections to the classification scheme within the POA, which separates claims that are of equal rank. 

“The court has listened carefully to the arguments yesterday and today. These preliminary rulings assume for present purposes that a disclosure statement will be approved by around the end of this month, but the court, obviously, has not made that decision yet,” the Title III judge said in her ruling. “Nevertheless, in order for there to be a practical possibility of holding confirmation hearings beginning in November, as proposed by the oversight board, discovery will need to begin immediately, and it is important for the parties to have a sense of the overall framework that the court contemplates.” 

Judge Swain ordered the FOMB to amend the disclosure statement to include an explanation of the risk to creditors in the event that the commonwealth government does not support the POA, including the likelihood that legislation needed to approve the new GO and PBA bonds creditors will be issued in exchange for the old securities. Gov. Pedro Pierluisi, of the New Progressive Party, and opposition Popular Democratic Party lawmakers have been steadfast in their opposition to proposed government pension cuts in the plan. 

The FOMB filed a lawsuit earlier this month against the administration for enacting the Dignified Retirement Act (Act 7 of 2021), which would ban proposed cuts contained in the debt restructuring proposal filed in federal court. 

Attorneys for the oversight board warned during the hearings that if the island’s lawmakers and the oversight board fail to reach a deal, the current restructuring agreement with bondholders could be at risk of falling apart by casting doubt on the legality of the new bonds. 

“In 24 hours of issuing the order summarizing this schedule, the oversight board is directed to file a revised proposed confirmation and discovery procedure order that incorporates these rulings,” the Title III judge said. “The oversight board is expected to immediately convert the disclosure statement depository into a plan depository, and upload within a week the documents it has agreed to upload in connection with confirmation, so that discovery can begin promptly upon approval of [the] disclosure statement. 

“The court recognizes the importance of bringing these Title III proceedings to closure so that Puerto Rico can move forward, but also recognizes the need for creditors to obtain discovery in order to fairly evaluate the proposed plan and to challenge it if they deem it appropriate,” she added. 

Judge Swain detailed a preliminary calendar for the POA discovery and confirmation process. She said that U.S. District Court Judge Judith Gail Dein will oversee the discovery process lasting from Aug. 3 to Oct. 11, assuming the order for the disclosure statement is issued. The confirmation trial will commence on Nov. 8 and end on Nov. 23, she said, adding that it will include cross-examination of witnesses. 

The judge said that objections to the proposed confirmation order should be filed on Oct. 22, while the FOMB’s reply should be filed on Oct. 29. 

“Fulfilment of the oversight board’s request to begin confirmation hearings in November is dependent on the government entities’ cooperation in discovery… The court expects the oversight board and Aafaf [ Fiscal Agency & Financial Advisory Authority] to fully respond to every request,” she said. “The schedule… could change very quickly if there is a pattern of foot dragging or nondisclosure or unnecessary objections that have to be managed by the court. This goes for creditors, too; they need to moderate the scope of discovery requests so that precious resources are not wasted.” 

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