Wednesday, August 12, 2020

Magistrate takes Puerto Rico fiscal board request for bond insurer documents under advisement

By on February 27, 2019

SAN JUAN – Magistrate Judith Dein took under advisement this week a Puerto Rico Financial Oversight and Management Board request to compel monoline bond insurers to submit certain documents as part of a proceeding in which they are seeking to put the Puerto Rico Electric Power Authority (Prepa) into receivership.

At a hearing in Boston, the magistrate also urged the parties to submit certain documents by the end of this week. National Public Finance, Assured Guaranty, Assured Municipal Corp. and Syncora Guarantee, which own billions in Prepa bonds, want to put the utility into receivership, contending that mismanagement is putting their collateral at risk.

The board filed a motion to obtain information regarding the insurers’ valuation of the collateral that they said is at risk. The monoliners contend the information is confidential because it is covered by attorney-client privilege and bank examiner’s privilege, and that the board is not entitled to the information because the insurers are trying to protect future Prepa revenues.

The board said the documents are relevant to demonstrating the value of the collateral of the bonds and their diminution. The loss reserve documents are relevant because they are likely to provide an indication of how insurers’ internal documents characterize and assess the value of the collateral allegedly securing the Prepa bonds before, at the time of, or following the filing of the bankruptcy-like petition under Title III the Puerto Rico Oversight, Management and Economic Stability Act (Promesa).

“Because these facts are critical to the outcome of the Receiver Motion, the Oversight Board is entitled to discovery of all relevant evidence. Insurers’ loss reserve information is obviously relevant to collateral value. Prepa’s bonds are nonrecourse,” the board said.

The insurers, on the other hand, said they have produced sufficient documents to show the value of their collateral and its threatened diminution. They also provided testimony from witnesses who asserted that mismanagement at Prepa will result in a reduction of their collateral.

Loss reserves, they said, are both irrelevant to any valuation of their collateral and privileged.

“What is more, the profound risks inherent in forcing regulated entities like the Insurers to reveal proprietary, confidential and highly sensitive information that they are required to provide to their regulators far outweighs the minimal probative value the information may contribute to determination” in the case, they wrote.

The insurers further said they shared loss reserves with their regulators under laws assuring that the information would remain confidential.

“Moreover, one of Assured’s primary regulators, the Maryland Insurance Administration, has expressly asserted the bank examiner privilege over Assured’s loss reserves. Consequently, a variety of privileges bar disclosure of these documents, including the work product, attorney-client, and bank examiner privileges, and the potential prejudice from disclosure far outweighs any possible evidentiary value,” the firms said.

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