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Puerto Rico fiscal board to present debt adjustment plan for GOs in April despite Circuit Court rulings

By on March 13, 2019

Unsecured Creditors Committee complains it was excluded from Prepa, GO negotiations for debt adjustment plan

SAN JUAN – The March omnibus hearing on Puerto Rico’s bankruptcy, held Wednesday, turned into a “he said, she said” tale of contradictions between creditor representatives and Puerto Rico’s Financial Oversight and Management Board.

Martin Bienenstock, a lawyer representing the fiscal oversight board, said two Circuit Court of Appeals rulings were delaying a debt adjustment plan for the general obligation (GO) bonds, but he still expected to have a plan by April.

The first ruling declared the fiscal board unconstitutional because as federal officers its members should have been appointed in accordance with the Appointments Clause, which calls for the president to make the appointments with the advice and consent of the Senate. The middle court gave the White House 90 days to correct the problem.

The second Boston Court ruling found that bondholders of the Puerto Rico Employee Retirement Systems (ERS) had perfected a lien that allows them to claim rights over the collateral used to guarantee the bonds, which are the employer contributions. While Bienenstock did not mention it, other ERS bondholders are challenging a local legislature joint resolution that was passed June 25, 2017, to terminate employer contributions to the ERS. This litigation remains pending.

Bienenstock said the fiscal board asked the U.S. Supreme Court to paralyze both rulings and appeal them. He said a final ruling on the ERS bondholder case would determine the contents of the debt adjustment plan for secured central government debt.

The board’s attorney, however, said the oversight panel expected to have a draft debt adjustment plan by sometime in April even if it does not have the support of creditors, a remark that strongly suggested a potential cramdown.

Meanwhile, another litigation is underway to annul about $6 billion in GO debt. Mark Stancil, an attorney for GO bondholders, complained that the board’s decision to pursue invalidation of that part of the debt will only create more litigation and noted that the board has failed to bring about the structural reforms needed in Puerto Rico.

Peter Friedman, a lawyer for the island’s Fiscal Agency and Financial Advisory Authority (Aafaf), replied that the newly released draft fiscal plan, issued March 10, discusses important structural reforms, and added the government has made strides with respect to transparency and is committed to reform.

A matter that was not on the agenda, but was discussed, was media coverage about the debt adjustment plan of the Puerto Rico Sales Tax Financing Corp., which left some bondholders with disproportionate losses.

Senior Cofina bondholders were supposed to receive 93 cents on the dollar, while junior holders would get 56 cents. When Cofina creditors exchanged their bonds for the restructured bonds Feb. 12, the swap was so poorly structured that many investors found they got less than what they were promised.

Brian Rosen, a lawyer representing the fiscal board, explained the process of distribution using a chart illustrating the steps that were followed. He said that to maximize recovery for bondholders, the plan also set aside $25 million. He added that articles started to pop up on day one on social media about problems with the distribution and the process was not allowed to conclude.

“The noise has quieted down; do not know of anyone expressing concern about distribution,” he commented.

Seeking inclusion

On the other hand, Luc Despins, representing the Unsecured Creditors Committee (UCC), complained that the group has been excluded from the negotiations of a debt adjustment plan for the Puerto Rico Electric Power Authority (Prepa) as well as for the GOs.

In the case of the electric utility, the committee was excluded from negotiations since last year. Despins said the group was caught by surprise after learning an agreement in principle had been reached with the Prepa Ad Hoc Group of Bondholders, referring to a preliminary restructuring support agreement reached July 30, proposing that Prepa bondholders exchange their uninsured bonds for two bond tranches secured by a staggered transition charge on energy consumption. That agreement is still being worked on.

“It took us until January to get the various exchanges between the board and Prepa’s secured creditors,” Despins said. The attorney also said he “almost had a heart attack” upon learning from Bienenstock about a debt adjustment plan that will come out in April because “we have not seen it.” He insisted that the UCC had a statutory right to be included in the adjustment plan’s formulation.

Bienenstock replied that there was no effort by the board to keep the committee in the dark but that he did not think the UCC should have a place on a negotiation table involving secured claims.

“When we get to the unsecured creditors, they will be involved,” he said.

Judge Laura Taylor Swain noted it was obvious Despins wanted to have a say in the debt adjustment plan.

Another fiscal board attorney, Michael Luskin, spoke about the report on McKinsey & Co., which works with the board and a subsidiary of which held investments in Puerto Rican debt. The report by law firm Luskin, Stern & Eisler LLP did not reveal any wrongdoing by the adviser, but provided recommendations regarding disclosure requirements for vendors, which the board said it will implement.

Also Wednesday, Judge Swain approved payments to professionals working in the island’s bankruptcy case between June and September. A request by the court fee examiner for new presumptive standards, including a hike of 5% in the rates, was postponed until April.

The judge also sided with a request to annul numerous claims against Cofina for different reasons, including that they were duplicate. She dismissed a claim raised by four credit unions because it was not filed on time after lawyers said the unions were attempting to again litigate aspects of Cofina’s debt adjustment plan.

The next omnibus hearing is slated for April 24.

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