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Puerto Rico debt report questions role of Banco Popular

By on August 21, 2018

SAN JUAN – The independent investigator that probed the causes of the island’s more than $70 billion debt questioned the role of Banco Popular in a 2014 general obligation (GO) bond issuance it underwrote before Puerto Rico stopped servicing its public debt.

“The short time between the 2014 GO Bond issuance and Puerto Rico’s insolvency raises questions not only about disclosures, but also about the professional obligations of the individuals who advised Puerto Rico in connection with the issuance,” reads the final document of investigator Kobre & Kim, issued late Monday said.

The report, which provided a summary of numerous causes of actions, reviewed evidence that in 2014, Citi and Banco Popular prepared a memorandum for Government Development Bank (GDB) Chairman David Chafey and other senior bank officials suggesting a “holistic approach” to Puerto Rico’s financial situation.

“The analysis, according to a witness, was that a long-term GO issuance did not make sense. Instead, the proposal envisioned nearly $2 billion in immediate liquidity improvements through securitizing property tax-backed and sales tax-backed municipal loans.

“The proposal also called for a Balanced Budget Act, a Fiscal Control Act, and the establishment of a five-member oversight body including appointees of the Federal Reserve and U.S. Treasury, as well as a member with well known bond market credentials.

“A Citi witness stated that it made more sense to follow some of the suggestions in the memorandum, rather than do another bond offering. The witness also expressed his view that, after having a conversation with GDB about Citi’s recommendations in the memorandum, Citi could not in good conscience underwrite another bond while proposing a different path,” the report reads.

According to a former GDB official involved with the underwriting syndicate for the 2014 issuance, Citi did not participate in that issuance because it had concerns about Puerto Rico’s fiscal challenges and thought the island needed a fiscal board and reform measures.

Popular, on the other hand, was a member of the underwriter syndicate.

“If we accept the evidence that Popular advised against the issuance, then the fact that Popular underwrote the 2014 GO Bond Issuance after making a recommendation against it may raise questions for interested parties. For example, to the extent Popular obtained an undeserved benefit as a result of its underwriting of the 2014 GO Bonds after advising against their issuance, an unjust enrichment claim may be considered by various interested parties, although it also could be subject to various defenses (including, for example, that in Puerto Rico, unjust enrichment is a subsidiary claim, meaning it is only available in situations where there is no other available action to seek relief),” the report said.

Based on evidence, the report says a court could conclude that the actions of Popular, “standing alone or in conjunction with other actions, may serve as a basis to equitably subordinate any claim it files in the Title III Proceeding to other claims because Popular earned fees from underwriting” the bonds after recommending against their issuance.

“Accordingly a court could find that Popular meets the elements for equitable subordination if it finds that Popular’s actions: (i) constitute inequitable conduct; and (ii) that this conduct resulted in an unjust benefit to Popular and a corresponding detriment to other stakeholders,” the report added.

In a statement Tuesday, Popular said it “is studying the matter closely and will not publicly comment on the specifics of the Report’s findings concerning Popular in view of ongoing and potential related court proceedings.”

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