Tuesday, November 12, 2019

Swain’s World: Viability of Cofina Deal Stirs Questions

By on April 18, 2019

Ambac Denies it is not Backing Cofina Bonds; Supports Repeal of $6 Billion in GOs

Editor’s note: The following was first published in the April 18-24, 2019, issue of Caribbean Business.

Ambac Assurance Corp. (AAC), which insures Puerto Rico Sales & Use Tax Financing Corp. (Cofina) bonds, has denied allegations made by certain Cofina bondholders that it is no longer backing the bonds as part of Cofina’s debt-adjustment plan.

The debt-adjustment plan, which went into effect in February, restructured about $16 billion in island debt.

Under the Cofina term sheet, holders of AAC insured senior Cofina bonds had two options. The first was to commute their rights with respect to the AAC insurance policy associated with the senior Cofina bonds, which would then be canceled, in exchange for new Cofina bonds, cash amounts to be paid by Cofina and other considerations by the ACC. The second option was to exchange their senior Cofina bonds for trust certificates issued by a custodial trust, which the trust would get distributions from Cofina under the new bonds plus payments under the existing AAC insurance policy to cover any shortfalls.

Sources close to Ambac said 75 percent of the Cofina junior bondholders took the first option and “tore up” the policy. The remaining took the second option and have their policy intact. Ambac, according to sources, is on the hook to pay what is owed on the policy if Cofina ever defaults. In the meantime, Ambac must pay any shortfalls if Cofina is unable to pay the entire value of the bonds. For instance, if a bondholder gets 93 percent of the value of the bonds in Cofina payments, the insurer will have to pay the 7 percent difference on the value of the bonds that the Cofina bondholder did not receive.

Ambac, meanwhile, filed a motion April 10 to support the bonds issued by the Public Buildings Authority from government attempts to prevent them from getting priority status payment, while supporting efforts from the commonwealth to repeal some $6 billion in general-obligation (GO) debt issued in 2012 and 2014. Financial Guaranty Insurance Co. and National Public Finance are also supporting the repeal of the $6 billion debt, even as thousands of bondholders have filed documents.

Meanwhile, certain banks, including the Bank of New York Mellon and Bank of America, are objecting to attempts to compel them to provide information on secured bondholders.

Trillions in claims

On April 15, the commonwealth and other debtors filed more than a dozen objections to thousands of monetary claims filed by creditors that were either duplicates or defective, where creditors could not provide evidence of a real claim.

In 2017, the commonwealth, Puerto Rico Electric Power Authority, Highways & Transportation Authority (HTA) and Employees Retirement Systems (ERS) filed for bankruptcy protection under the federal law Promesa, which creates a bankruptcy process for territories. Most of the objections were related to claims filed against the ERS, which filed for bankruptcy May 21, 2017.

On Jan. 16, 2018, the debtors filed their motion for order to establish deadlines and procedures for filing proofs of claim and the manner of the notice. That deadline was June 29, 2018.

“Of the proofs of claim filed, about 55,000…[were] in relation to the ERS. The ERS-related proofs of claim total about $10.1 trillion in asserted claims, in addition to unliquidated amounts asserted. As noted above, because the ERS is a special-purpose entity with only about $2.9 billion in funded indebtedness, it is clear that substantially all such claims are inappropriate,” one of the objections read.

To efficiently resolve as many of the unnecessary proofs of claim as possible, the debtors filed an order Oct. 16, 2018, seeking limited omnibus objection procedures and waiving certain requirements. The order was later revised.

“Each of the deficient claims purports to assert liabilities well in excess of $1 billion but fails to provide a basis for asserting a claim against the ERS, the commonwealth or another of the debtors. Of the deficient claims, one asserts liabilities in the amount of $32 billion, but states as a basis for the claim that claimant is a teacher who has provided services, without providing any information regarding salaries or benefits owed to the claimant by the ERS, the commonwealth or any other debtor,” one of the objections says.

There were 165,466 proofs of claim filed against the debtors, which total $43.5 trillion. Some 2,336 claims were filed against the HTA, totaling $83.1 billion, which means most claims were duplicates. Of the proofs of claim, about 103,329 were against the commonwealth, which filed five omnibus objections to object to duplicates. It also filed several objections to claims that were deficient.

The commonwealth is currently trying to repeal about $6 billion in GO debt it claimed was illegally filed. The Unsecured Creditors Committee is trying to annul $3 billion in ERS bonds that were also issued in violation of the law in 2008.

Secured Creditors of the ERS, headed by Andalusian Global Designated Activity Co., on April 15 asked Magistrate Judge Judith Dein, one of two judges overseeing the bankruptcy process, to compel the commonwealth, the ERS and P.R. Fiscal Agency & Financial Advisory Authority to produce some 509 documents that they wrongly withheld, using as an excuse the attorney-client privilege. It is part of a process from creditors to seek a trustee for the ERS. Regarding Andalusian, the company is also seeking a protective order after the island’s Oversight Board sought to do depositions on more than 23 different topics that lawyers for Andalusian, Mason Capital Master Fund and Puerto Rico Fund say are burdensome and broad.

In addition, this week, Judge Laura Taylor Swain announced there will be an omnibus hearing in San Juan on April 24.

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