Tuesday, September 24, 2019

Puerto Rico fiscal board seeks to recover over $1 billion from bondholders, banks and others

By on May 2, 2019

(Jaime Rivera/CB)

‘Holders of smaller amounts of bonds will not be affected’

SAN JUAN – The Financial Oversight and Management Board for Puerto Rico on Thursday filed complaints to recover more than $1 billion from holders of bonds issued in excess of Puerto Rico’s constitutional debt limit, and from firms and advisers that helped with the issuance of those bonds.

The adversary proceedings come as a statute of limitations of two years after the board filed for bankruptcy on behalf of the commonwealth on May 3, 2017, is slated to expire. The suits are part of allegations that $6 billion in general obligation bonds issued in 2012 and 2014 violated the constitutional limits.

The board is also alleging that Public Buildings Authority bonds should have been counted toward the constitutional debt limits, arguing they are a sham used to pay for infrastructure through PBA leases and are guaranteed by the commonwealth.

The board filed claims against more than 20 banks, law firms and other parties to recover fees they earned when they helped issue nearly $9 billion of bonds by the commonwealth and certain instrumentalities.

The entities sued include Barclays Capital, BofA Securities, Merrill Lynch Capital Services Inc., Citigroup Inc., Goldman Sachs, J.P. Morgan Chase & Co., Jefferies Group LLC, Mesirow Financial Inc., Morgan Stanley, Ramírez & Co., RBC Capital Markets, Santander Securities, UBS Financial Services Inc. of Puerto Rico, VAB Financial, BMO Capital Markets, Raymond James, Scotia MSD, and TCM Capital.

Claims were also filed against ANB Bank, Jefferies and Bank LLC, Northern Trust Company/OCH-ZIFF Capital Management, Union Bank and Union Bank Trust Co., Bank of New York Mellon, and First Southwest Co.

The Board also listed the law firm of Sidley Austin LLP of Chicago as a defendant.

In relation to UBS, Morgan Stanley and Merrill Lynch, besides recovering fees for their participation in the bond issuances, the suits also seek to recover fees for their role in “interest rate swaps,” or forward contracts in which one stream of future interest payments is exchanged for another based on a specified principal amount. The suits say the firms received about $394 million in fees.

“These parties aided and abetted the Government Development Bank’s breach of its fiduciary duty to the people of Puerto Rico and, as a result, were unjustly enriched by receiving hundreds of millions of dollars in fees,” the board said in a statement.

“The people of Puerto Rico have been damaged by these parties in an amount to be determined at trial and are therefore liable for damages caused as a result of the underlying breaches of fiduciary duty,” the board said.

The fiscal panel also filed several hundred complaints against entities to recover payments they received on account of “invalid” bonds. The board said it intends to proceed with the clawback litigation against large bondholders who own at least $2.5 million worth of the bonds that are being challenged in the U.S. District Court for the District of Puerto Rico.

The panel said it does not intend to prosecute the clawback litigation until the District Court determines the challenged bonds are invalid.

“Holders of smaller amounts of bonds will not be affected—they will not have to pay back any principal or interest they received from their investment in the challenged bonds,” board member David Skeel said.

Bondholders may have relied on information provided by the issuers, underwriters, and other professionals and lenders when they invested in the bonds, the board posited.

“The Oversight Board is sympathetic to these concerns. But the laws of Puerto Rico limit government borrowing authority for a reason: to prevent the government and its financiers from obligating the Commonwealth and its instrumentalities, as well as taxpayers and legitimate creditors, to a level of debt that cannot be repaid without sacrificing services necessary to maintain the health, safety, and welfare of Puerto Rico and its people,” the board said.

“The Oversight Board did not take the decision to claw back payments lightly,” Skeel stressed. “However, Puerto Rico’s taxpayers should not have to shoulder payments the government made to big investors that should never have been made in the first place.”

The president of the Puerto Rico Manufacturers Association, Rodrigo Masses, said the board’s demand for the return of payments made to suppliers of goods and services of the government, harms the business climate and increases uncertainty.

The board alleges those payments were fraudulent because the government was insolvent when it issued them and the defendants were likely aware of that fact.

“At the same time that we repudiate any illegality that any of the parties may have contracted, we reserve the right to use any mechanism to defend our partners,” Masses said.

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