Sunday, April 21, 2019

Swain’s World: GO Bondholders Want Level Field for Modest-Size Investors

By on April 11, 2019

We do not Want a Repeat of Cofina’s Debt Adjustment Plan, Investor who Requested Committee Says

Editor’s note: The following was first published in the April 11-17, 2019, issue of Caribbean Business.

A retail investor, who purchased a modest amount of general-obligation (GO) bonds in 2012, asked the U.S. District Court for special considerations for small investors, including the appointment of a Committee for Modest-Size Bondholders that would allow them to fight attempts by the Unsecured Creditors Committee (UCC) and Financial Oversight & Management Board to invalidate their debt.

In January, the UCC and Oversight Board filed a request to invalidate $6 billion in GO bonds sold in 2012 and 2014, contending the issuances violated debt limits. The UCC and Oversight Board are also seeking a declaration stating Public Buildings Authority (PBA) bonds are a “sham” used to issue debt that was not in the commonwealth’s name but payable through general revenues. The impact of this process would be that the PBA would have no right to receive post-petition rent payments. The UCC, meanwhile, is also seeking the invalidation of $3 billion in public pension bonds sold in 2008.

Peter Hein, whose request was previously rejected by Judge Laura Taylor Swain because he did not first direct it to the U.S. Trustee, attached a letter to his request sent by U.S. Trustee Daniel McDermott stating that his office did not comment on the appointment of official committees nor was it considering taking any action.

Hein, who is representing himself, requested that all pro se litigants like himself be allowed to file documents electronically themselves as is allowed in other courts or in the alternative to be able to serve papers by submission by email to Prime Clerk, the firm that is managing the Title III case. He also said they should be able to listen to proceedings over telephone.

“Many individual bondholders are affected by these proceedings, but most will not have a sufficient stake to make it economically feasible to retain counsel with access to the Puerto Rico District Court e-filing system,” he wrote.

Hein insisted upon the appointment of a creditor committee to represent individual bondholders with modest holdings of GO bonds because of what he called the “unfair asymmetry” among stakeholders as the Oversight Board and UCC “have unlimited resources and funds to pursue an effort to invalidate individual bonds.”

He noted the hundreds of pro se notices that have been filed to date to object to the invalidation of the GO debt. In addition, he said the proposed committee would be appropriate to avoid the conflicts that permeated the negotiations toward the debt adjustment of the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym), which recently restructured some $17 billion in debt through a deal in which, he said, some creditors got an advantage.

“In the course of confidential mediation and settlement proceedings, (i) certain creditors with major holdings sought and received added consideration not enjoyed by all holders, and (ii) Puerto Rico representatives successfully negotiated for added and different consideration for Puerto Rico residents (discriminating against United States citizens in the 50 states),” said Hein, who also suffered losses in the restructuring of Cofina’s debt.

These conflicts, he said, were in addition to the conflict between senior and subordinate Cofina bondholders, referencing the fact that junior Cofina bondholders had huge losses in the restructuring. As part of the deal, Cofina bondholders exchanged their bonds for new ones but senior Cofina bondholders recovered about 93 percent of the value of their bonds while junior holders got about 53 percent.

The Cofina plan documents and disclosure statement were turgid and difficult for individual Cofina bondholders to understand. It also failed to disclose the consequences of the plan to modest-size bondholders.

“All these problems were compounded by the fact that the notice to Cofina bondholders that provided a copy of the disclosure statement and proposed plan (on a flash drive) was mailed so as to be received prior to the Christmas-New Year’s holiday period with dates for objection and voting on Jan. 2 and 8,” he said of the Cofina plan that went into effect Feb. 12, 2019.

He also noted that major bondholders who received added consideration not available to all bondholders also impacted the voting to the detriment of retail or individual bondholders with modest Cofina subordinate bond holdings.

Major bondholders and Puerto Rico plan proponents, he said, had their fees paid through the negotiated Cofina plan either directly or in the form of consummation costs of $332 million. But modest-size Cofina bondholders did not receive any payment of their costs and expenses and were not represented in the negotiations, which he said ended up with a Cofina plan that was skewed in favor of the major bondholders.

In advocating for the creation of the committee of modest-size bondholders, Hein said there may be a commonality of interests between all GO bondholders in vigorously resisting efforts to invalidate their bonds.

If the court is unable to appoint the committee, Hein said that at least it should ensure there is adequate representation of bondholders with modest holdings in the negotiations toward a restructuring of the debt.

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