SEIU President Warns of Promesa Deficiencies After GDB Default

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Says Law Doesn’t ‘Provide the tools’ to Cut Debt to a Sustainable Level

SAN JUAN — Concerns over how the Financial Oversight and Management Board (FOMB) for Puerto Rico is managing the restructuring process came up again for Service Employees International Union (SEIU) President Mary Kay Henry after the Government Development Bank (GDB) only had cash for 56 percent of the debt service payment due Feb. 20. 

The GDB’s default comes only over year after the FOMB restructured the bank’s debt for which the fiscal entity didn’t use the contentious bankruptcy process established in Title III of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa). Instead, the bank remains the only entity to have completed the restructuring process through Title VI for consensual agreements. 

Tuesday’s “press reporting of an Electronic Municipal Monitoring Access system (EMMA) filing notifying the market that a part of the Government of Puerto Rico is now unable to pay bondholders, even after restructuring under Promesa, provides concrete evidence of what SEIU and its members in Puerto Rico have been saying all along, ‘Promesa es Pobreza,’ or Promesa is Poverty,” Henry said referencing the article in Bond Buyer, which first reported the filing. 

The SEUI president went on to argue that fiscal board members are not considering expert analysis that suggests Puerto Rico’s public debt should be cut to more than double the amount the FOMB is accepting. 

“The Oversight Board has done no better in seeking deeper cuts. It too has chosen to reward Wall St. hedge funds at the expense of the people of Puerto Rico,” Henry stated.     

GDB debt was reduced by 33 percent after its restructuring, a similar number to what the fiscal board is proposing for general obligation bonds in its Plan of Adjustment for the commonwealth. 

The GDB has two debt service payments a year, one in February and one in August. Feb. 20 marked the third payment, which was supposed to be of just under $80 million, but the GDB Debt Recovery Authority only reported having $53.8 million available. After deducting $2.5 million for administrative costs and $8.1 for the fees and expenses reserve, the GDB could only pay $43.2 million. The remaining $36.4 million would be paid in the future. 

Henry stressed that Promesa’s deficiencies are the problem and joined other voices that predict Puerto Rico is headed for a second bankruptcy process. 

“SEIU warned Congress that such a result would happen because Promesa did not provide the tools Puerto Rico needed to cut its debt to a sustainable level and succeed in transforming itself,” the union president said, adding that the union “also warned Congress that a second restructuring proceeding would need to occur if Puerto Rico continues on its current course. Today’s announcement of this default event is proof that SEIU’s members are right.”

Sobrino Stares Down Debt

Editor’s note: The following originally appeared in the Jan. 17-23, 2019, issue of Caribbean Business.


This is a revolution—we’re back in 1776,” so begins the allocution of Christian Sobrino, who holds the thankless job of heading the Fiscal Agency & Financial Advisory Authority (Fafaa, or Aafaf by its Spanish acronym) and is the Puerto Rico government’s ex-officio representative on the Financial Oversight & Management Board (FOMB). That entity is a creature of the U.S. Congress, created under the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) to oversee the island’s financial and fiscal affairs as a condition to enable the law, which includes a provision, Title III, for bankruptcy-like proceedings. Puerto Rico was stripped of its ability to file for bankruptcy in 1984.

Upon enabling the federal law, Congress set in motion an experiment that has seen Puerto Rico’s government and the oversight board clashing over directives issued by the panel that are often ignored or fought on grounds, says the Rosselló administration, that the board is overstepping its bounds. Those dustups—refusal by the Rosselló administration to implement a two-day monthly furlough for government employees and reneging on the FOMB order to suspend the granting of Christmas bonuses to public employees—have bolstered claims by critics who allege Promesa is a flimsy law with many gray areas. Sobrino disagrees.

“I don’t think the law is flimsy; we just have to administer it correctly,” Sobrino said during an interview that took place in the boardroom on the fourth floor of Aafaf’s headquarters, which once was home to the Government Development Bank (GDB), the former fiscal agent for Puerto Rico that was liquidated as part of a debt-restructuring strategy set in motion in the final two years of the Alejandro García Padilla administration.

The writing on the wall

Sobrino, who was a young attorney in the days when the “good bank, bad bank” ploy was being concocted by Puerto Rico’s financial advisers at Cleary Gottlieb and Millco, saw the writing on the wall well before the death knell.

“I started to think the end was near for the GDB in 2013,” said Sobrino, who was a young attorney in private practice at the time. “We were working on the Comprehensive Cancer Center financing—a $200 million loan. And I was thinking why are you taking such a forward hit; you have liquidity issues and you are hiring people to deal with this—right? People forget that people like Millstein and Proskauer, Cooper—all of those guys came at the end of 2013, the beginning of 2014 to help the GDB.

“To be honest, I had concerns even when Carlos [García] was here—me being a young attorney and seeing what was happening—how the economic situation started to deteriorate even with stimulus programs like ARRA [American Recovery & Reinvestment Act] going on. And I questioned if this model worked—where you took your general fund and your operating accounts for each of the government entities and essentially turned it into an investment vehicle for development purposes. I think that worked great for a long time. It still works great in North Dakota and it works in some other states.”

Sadly, the government’s fiscal agent jumped off the rails more than 10 years ago—when short-term debt was ratcheted up to fund public corporations and the central government’s unbalanced budgets, a practice known as deficit financing. The bank veered from its role as the lender for infrastructure works and as the fiscal agent responsible for economic policy to become a bankrupt lender of last resort. The numbers are ominous indicators of the GDB’s inevitable insolvency.

“Liquidity dropped from $5 billion in 1989 to less than $500 million in 2016, while at the same time the portfolio of loans jumped from $1 billion to $8.3 billion,” former GDB President Melba Acosta told Caribbean Business during an exit interview in 2016.

“I thought the GDB was a great concept, but it wasn’t there. We didn’t have the culture that was implemented in the beginning,” Sobrino says with a hint of nostalgia coloring the sound of his voice. “When it was created in the 1940s, the original purpose was to turn your general fund into an investment vehicle for infrastructure and economic development, much the same way that North Dakota did with its Agriculture Bank. And that worked great, if you think about it, we are surrounded by the GDB’s legacy—the Museum, Hotel La Concha, the Vanderbilt, the Highways. I don’t think people appreciate what we lost last year when it closed; we lost something great. We lost an institution that formed generations of lawyers, of bankers, of accountants, of economists. And we don’t have anything nearly ready to take its place yet. We should work on getting that; developing an institution that trains people to be leaders and professionals in society.”

Can Aafaf be something like that? “I think Aafaf is an intermediate institution; it reflects what we need now for certain transactions and work,” Sobrino replied. “I think Aafaf and other agencies will eventually merge and evolve into something that could be that. I am not sure yet; I am not clairvoyant. But we need something like that.”


For now, Sobrino’s time is occupied trying to secure consensus in public policy that is being dictated by an oversight board that was imposed on Puerto Rico as a condition for the passage of Promesa. Think of him as a goalie attempting to defend Puerto Rico’s goal with one arm tied behind his back. As the ex-officio representative on the FOMB, his role is pro forma—he delivers reports, answers questions and the seven members of the control board tell him what fiscal measures they expect of the Rosselló administration.

Meanwhile, professional and financial advisers in this legal jamboree under Promesa’s Title III bankruptcy proceedings have racked up more than $300 million in legal and advisory fees in the two years since the inception of Promesa in June 2016. Those overblown costs led to the appointment of Brady Williamson as fee examiner in October 2017 to rein in those rampant fees. Sobrino said that when it has come to the consultants working for Aafaf, who are subject to the fee examiner, the entity has been fair in its observations. “I do have some issues with the amounts that some consultants on the other side charge and my perception of their value. I like flat-fee arrangements. They are productive but my consultants on flat fees have to keep time sheets. That is a standard in the accounting world. Keeping time sheets is good for managing the contract,” Sobrino said, adding that companies that charge a lot of money to the island should “at least set up shop here.”

Sobrino took pride in the fact that his consultants have not increased their fees as others have done because “I crack the whip and my consultants know what they have to do.”

Regarding the conflict of interest by McKinsey & Co., which advises the island on its debt, but also owns Puerto Rico bonds, Sobrino said the matter should be investigated aggressively. “It would not have been tolerated had it been a government consultant. I am looking forward to what the independent investigator will publish,” he said. Sobrino declined to say whether he told the board [FOMB] to cancel the contract, merely saying, “They hear my opinions about every consultant.”

In his role as director of Aafaf, Sobrino is keeping his eyes peeled on negotiations between the Rosselló administration and the diverse creditor constituencies in restructuring Puerto Rico’s more than $70 billion debt.

Chinese checkers

Caribbean Business inquired about what Puerto Rico should expect regarding the restructuring of commonwealth agencies, in general. Sobrino said he does not agree with the theory that after the Puerto Rico Sales Tax Financing Corp. (Cofina) restructures its $17 billion debt, other agencies will follow suit in a domino effect because of the complications with each type of debt. Each debt is being worked upon on a credit-by-credit basis.

“I don’t see the dominoes. Everyone expected it to be very orderly. They would first see GO [general-obligation bonds] then Cofina and you would follow the stack down. But there is a much more complicated scenario and you have to take each credit on its own terms,” he said.

Aafaf is trying to find credits in which the parties, legal advisers and economic situation lend themselves to “good restructuring” at a given time. If that does not work, Promesa’s provisions allow for a “cramdown,” or forced restructuring. “I don’t think there is a domino effect and we proved that with the GDB. Everyone thought the GDB could not be closed until we closed GO and Cofina, but we showed that it could be done,” he said.

In that regard, Sobrino did not expect the $9 billion restructuring of the Puerto Rico Electric Power Authority (Prepa) to move forward any time this year because a group of monoline bond insurers are currently in court seeking a receiver for the power utility in an effort to hike up rates and pay debt. “That does not lend itself to a positive negotiation process. I would love to sit down with them and see if we can negotiate something, but if that is the position, then we have to unfortunately fight it out,” he said. Monolines, he added, are refusing to negotiate because they benefit from the delay.

Utility players

Sobrino said there will never be a receiver in Prepa and opined that monolines refuse to negotiate a debt settlement because they get unfair advantage through a delay. “I am going to privatize Prepa first because there is never [going to be] a receiver,” he said.

Right now, there are five companies vying to take over Prepa’s transmission and distribution system, including consortiums. All are from the United States. “They are all serious players and are all involved in the energy sector,” he said.

While Sobrino assured everything is on schedule to announce the name of the company that will lease Prepa’s transmission and distribution system, Prepa’s executive director, José Ortiz, said in a radio interview that the entire privatization process may be delayed because of the partial shutdown of the federal government and the energy agencies that are helping Prepa are not working.

Meanwhile, the government is developing a new energy policy, Senate Bill 1121, which calls for the island to use 100 percent renewables by 2050. Sobrino says the government is trying to clarify the language to establish the exact jurisdiction for the Energy Bureau and provide it discretion to implement the reforms and causes of action that could arise, “[so] there is a clear mandate over who is responsible to impose those policy directives,” he said about the requested amendments, denying that the government wants language to ensure it can control the composition of the Energy Bureau.

Another entity that for the past few years has said it is close to restructuring is the Puerto Rico Aqueduct & Sewer Authority (Prasa), which has a $4 billion debt. Sobrino said he expected the water utility to announce a debt deal “in the coming months.”

However, Prasa recently paid about $1.6 million of debt and announced it will continue to pay debt while negotiate its restructuring. “Prasa has not failed to make a payment on its senior bonds. It is working on its negotiations with the EPA [U.S. Environmental Protection Agency] and with the USDA [U.S. Department of Agriculture] on the federal part of the debt stack. A very critical component included refunding the revolving fund,” he said.

While Prasa is “a very good entity,” Sobrino said the issue with the debt is having the ability to implement a capital improvement plan for its infrastructure.

Agents of change?

On the other hand, Sobrino said he expects Judge Laura Taylor Swain to approve the plan of adjustment to restructure the $17 billion debt of the Puerto Rico Sales Tax Financing Corp. (Cofina), which was approved by a majority of the bondholders in a preliminary plan. The terms, however, have been objected to because these could lead to another default and result in stringent austerity measures to be able to pay the debt. Junior Cofina bondholders have also raised objections about their low recovery in a proposed bond exchange.

“A lot of the opposition to the Cofina deal is ideological or is pursuing the economic interests of other parties,” he said.

One of the objections to the Cofina deal argues that the oversight board manipulated the negotiations because it has control over the commonwealth side of the dispute, as well as Cofina, in a conflict of interest. The FOMB, however, delegated the negotiations toward the debt deal to two independent agents.

“I was not in favor of the agent structure then, and I still don’t agree that it was the best procedural structure, but I am happy with the results. We would have been able to do it without the agents,” Sobrino said.

The government, he noted, does not favor the view that the island’s debt should be wiped out but restructured according to the island’s condition. “A more moderate approach, in which you recognize that Puerto Rico’s debt needs restructuring, is better. Otherwise it does not work,” he said.

Regarding allegations that Cofina may have fraudulently filed for bankruptcy because the government has failed to submit audited financial statements since 2015, Sobrino replied that the process of doing the audits for 2016 and 2017 has been difficult because of the complexities with the island’s fiscal state. “It is easier said than done,” he said.

He said he was surprised the oversight board recently published a letter chastising the government over delays with audited financial statements because they have been kept informed about the problems and complexities to finish them.

He dismissed claims Cofina may have fraudulently filed for bankruptcy by saying, “The people who have said that are now parties to this deal…. That is not true at all.”

Claims to fame

Sobrino also rejected allegations Puerto Rico can pay its debt because it has billions of dollars or nearly $4 billion in its Treasury Single Account (TSA). Aafaf publishes weekly reports on the level of funds in its TSA. What should people understand about the TSA?

Sobrino said allegations that Puerto Rico is being dishonest about its liquidity is a “misreading of the facts…. How can you be dishonest when you are the one publishing the reports?”

He noted that while it may seem like Puerto Rico does not have liquidity problems, it does have solvency problems and has yet to determine the impact of the Pay-Go provisions (pay-as-you-go) on the fiscal state of its retirement systems. “The reason it has accumulated so much cash is because we are operating under a budget that we think cuts too [much]. [The TSA] is high but I would not generate a false sense of security because, while it may appear Puerto Rico does not have a liquidity problem, it does have a solvency crisis. It is there and may turn into a liquidity problem,” he said.

May is the deadline for avoidance of claims. Can you tell us something about actions or claims that may have been unjustified? Sobrino said he does not participate on the board’s Special Claims Committee but noted the group was taking its job very seriously. This week, the Special Claims Committee virtually said that bond debt incurred by the island after 2012 was illegal because it exceeded the island’s constitutional debt limits. The committee sought to annul $6 billion of total debt from two bond issuances, one for $2.3 billion and the other for $415 million, issued in 2012, and one done in 2014 for $3.5 billion, contending they were illegal. “All claims were based on invalid GO bonds that should be disallowed because the bonds were issued in violation of the debt-service limit and, in the committee’s view, the balanced budget clause, and, therefore, the bonds are null and void and the holders of such bonds have no remedy against the commonwealth,” the committee said.

Sobrino said that with the situation in Puerto Rico, it is easier to say something illegal happened but “a lot of this is structural in how some institutions were working…. I am sure corruption happens, but I would not say Puerto Rico’s entire fiscal situation is that. What we are facing in Puerto Rico is much larger,” he said.

Asked what he thought caused Puerto Rico’s fiscal crisis after reading the debt investigation completed by Kobre & Kim, he said: “I think a lot of the issues were due in part because people were forgetting that the GDB was not a piggy bank and a lot of pressure was put on its debt and that pressure was transferred to the general fund…. But it is much more complicated than that,” he said.

While this year, President Trump and Congress are slated to change the composition of the oversight board, Sobrino said he can work with whatever he has. He also considers the federal Promesa law, which rules the island’s bankruptcy process, does not need to be amended. “When the law is administered correctly, it can work. I don’t think it has that many gray areas. If it is administered properly, it can work,” he said.

Puerto Rico government: GDB Qualifying Modification successfully completed

SAN JUAN The Puerto Rico Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym) and the Government Development Bank for Puerto Rico (GDB) announced the consummation of the qualifying modification for the GDB under Title VI of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa).

The completion of the GDB’s qualifying modification marks the first successful use of the collective action procedures under Title VI of Promesa and the first Puerto Rico debt restructuring transaction closed under the law enacted for that purpose.

“The closing of the GDB debt restructuring is a historic milestone in Puerto Rico’s road to economic recovery. The closing of the qualifying modification for GDB is clear evidence that Puerto Rico has the credibility and resolve necessary to resolve its fiscal challenges. My administration is committed to continue negotiating in good faith with Puerto Rico’s creditors and pursue creative solutions that safeguard the best interests of the people of Puerto Rico,” Gov. Ricardo Rosselló said.

“The consummation of this transaction, for example, will provide combined debt service savings to the majority of Puerto Rico’s municipalities of approximately $55 million during the January 1 and July 1, 2019 payments, while also providing GDB’s diverse creditor constituency with adequate recoveries given the financial circumstances of the GDB,” Rosselló added.

AAFAF Director Christian Sobrino, the governor’s representative to the fiscal oversight board for Puerto Rico (CB file photo)

“Today’s achievement is the last step in what has been a long and difficult process that was only possible thanks to the leadership and support of Governor Rosselló and a constructive disposition to compromise by all of GDB stakeholders, including bondholders, municipalities, and our local cooperatives,” added Christian Sobrino, CEO of Aafaf and president of the GDB.

The GDB Debt Recovery Authority, a newly formed statutory public trust and government instrumentality, has issued nearly $2.6 bullion of 7.5% GDB Debt Recovery Authority Bonds (Taxable) due 2040 (DRA Bonds) to holders of participating bond claims of the GDB, with each holder receiving $550 of DRA Bonds for each $1,000 of participating bond claims of GDB they previously held. The DRA Bonds are expected to be delivered over the next few days, the release added.

Puerto Rico fiscal board, gov’t welcome court approval of Government Development Bank restructuring

SAN JUAN – The Financial Oversight and Management Board for Puerto Rico welcomed Tuesday Judge Laura Taylor Swain’s decision to approve the Government Development Bank’s (GDB) restructuring pursuant to Title VI of thePuerto Rico Oversight, Management and Economic Stability Act (Promesa).

In a release, the board wrote that, on Nov. 2, it “certified that subject to the court’s approval, the conditions to effectiveness of the Qualifying Modification under PROMESA 601(m) have been satisfied. Today, Judge Swain has announced at the hearing that she will approve the GDB Qualifying Modification as satisfying the criteria under PROMESA.”

Natalie Jaresko, the executive director of the board added in the release that the “Court’s approval represents a major milestone in the restructuring of Puerto Rico’s debt obligations,” and that the oversight panel congratulates the Government of Puerto Rico for its efforts and looks forward to achieving other consensual deals.

“This is a historic achievement for the final resolution of the GDB and a decisive victory in the fiscal recovery of the island. It is the first consensual agreement approved by the Federal District Court under Title VI of PROMESA. Once again, we evince the credibility of the efforts of the administration of Governor Ricardo Rosselló Nevares and our commitment to regain access to capital markets through negotiations in good faith, always protecting the best interests of Puerto Ricans and municipalities,” Christian Sobrino Vega, the GDB’s president and executive director of Puerto Rico’s Fiscal Agency and Financial Advisory Authority, said in a separate release.

The official added that the agreement had the participation of 74.85 percent of the creditors, “of which 97.42 percent voted in favor of the restructuring of the GDB.”

“I am glad we have taken these steps toward the building of a new Puerto Rico,” Judge Swain was quoted as saying in the release.

Unsecured Creditors, Puerto Rico settle dispute over gov’t bank restructuring

Unsecured Creditors, Puerto Rico settle dispute over gov’t bank restructuring

SAN JUAN – The Puerto Rico Fiscal Agency and Financial Advisory Authority and the Government Development Bank (GDB) for Puerto Rico announced Thursday that on Oct. 5, they reached a stipulation with the Official Committee of Unsecured Creditors to settle a dispute over the GDB’s restructuring support agreement.

The agreement, which was approved by creditors last month, includes transferring to the GDB Debt Recovery Authority the bank’s municipal loan portfolio and real estate assets. The authority will issue new bonds that will be backed by a lien on the assets equal to 55 percent of the outstanding debt. The agreement calls for the creation of a Public Entity Trust that will receive non-performing loans made by the GDB to other entities.

The “Committee Settlement Stipulation” requires that the GDB “make certain fixed and contingent cash payments to the Public Entity Trust at and after the Closing Date, and certain adjustments to claim amounts against, and the priority of payments within, the Public Entity Trust,” a statement reads.

Also that “the GDB acknowledge and affirm that certain legal claims with respect to GDB’s prior role as fiscal agent and financial advisor to certain Title III [of the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa)] Debtors and other governmental entities (to the extent any such claims exist) are the property of the applicable Title III Debtors and other governmental entities,” the statement continues.

The committee, on the other hand, agreed to withdraw, with prejudice, and not refile any claims challenging the GDB Restructuring Act, the Qualifying Modification or the GDB restructuring. The qualifying modification allows the debt issuer’s resources to be used by the commonwealth after consulting with creditors and being certified by the island’s fiscal oversight board.

The stipulation advances the island’s first qualifying modification of the debt under Promesa. The Unsecured Creditors Committee had sued to stop the proposed GDB restructuring deal, arguing it violated the court-ordered stay on litigation and Promesa in part because Title III debtors would not have been able to file legal claims against the GDB, which as the island’s fiscal agent was largely responsible for financial decisions made by the government.

Puerto Rico Government Development Bank restructuring hearing postponed until Friday

SAN JUAN – A hearing into the Unsecured Creditors’ Committee’s (UCC) request to obtain derivative standing as part of the process to stop the Government Development Bank’s (GDB) restructuring under Title VI of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa), was postponed until Friday to allow for negotiations that could end the dispute with the commonwealth.

The discussions were announced by Peter Friedman, a lawyer for the GDB and the Puerto Rico Fiscal Agency and Financial Advisory Authority, at a New York court Wednesday. Judge Laura Taylor Swain appeared to be aware of the discussions and agreed to the postponement, which was agreed upon by UCC lawyer Luc Despins.

The nature of the agreement to end the dispute was not revealed but sources with knowledge of the negotiations did not dismiss the possibility that the UCC will be allowed to make amendments to the restructuring deal.

The creditor group had filed a suit on Sept. 6 seeking derivative standing to stop the GDB restructuring because it would disallow any claims by the Promesa Title III debtors against the GDB, which was the commonwealth’s financial adviser before it became insolvent.

A creditor committee, according to the law, can seek derivative standing or permission to represent the debtor in possession when refusing to act on behalf of the estate.

In the past, the UCC has also complained that the government refused to allow it to access GDB documents to pursue its own claims. The group has been a vocal critic of the recent investigation commissioned by the fiscal board into the causes of the island’s debt because it did not identify individuals responsible for the debt crisis.

Also on Wednesday, the UCC appealed Judge Swain’s Sept. 18 denial of an order to enforce the automatic stay to stop the GDB restructuring, according to a certificate of service submitted to the court. Among her arguments, Judge Swain said at the time that the stay does not prevent Title III debtors from taking actions that could have an impact on the property or the estate. She said the GDB restructuring law is a vehicle to effect a transaction by debtors not against debtors.

Puerto Rico’s new chief investment officer takes on economic development plan

Editor’s note: The following originally appeared in the Sept. 6, 2018, issue of Caribbean Business.


Few phrases are more apt to describe Gerardo Portela’s move from the helm of the Fiscal Agency & Financial Advisory Authority (Fafaa) to become Puerto Rico’s chief investment officer (CIO) than “out of the frying pan into the fire.”

As Fafaa’s executive director, he spent the past year and a half growing the agency to nearly 80 employees and spent countless sleepless nights during renegotiations of the Sales Tax Financing Corp. (Cofina by its Spanish acronym), Puerto Rico Electric Power Authority (Prepa) and Government Development Bank (GDB) restructuring support agreements, which were often tied to the words “in principle” and “preliminary”—euphemisms for “not yet consensual.” Throw into the “frying pan” that he dealt with 15 certified fiscal plans, two certified budgets, and improved the financial information coming from Puerto Rico’s government with a website that is publishing information: “Everything from weekly cash flows for the central government—the Treasury Single Account [TSA]—to cash flows for the public corporations.”

When Caribbean Business caught up with Portela, he was barely finished unpacking his belongings in new digs on the second floor of the Palacio Rojo, a cobblestone’s throw away from La Fortaleza where he now has the unenviable task of bringing investment to Puerto Rico.

“As executive director of [Fafaa], I was taking over the right side of the balance sheet—the liability side—and helped pave the way towards fiscal responsibility. So, the governor talked to me and said that given my background and the previous work that I had done, the track record that I had, he wanted me to now work on the left side of the balance sheet—Puerto Rico’s assets,” Portela explains looking across a table that has scribbled notes, the product of brainstorming about his new role.

“My job is to optimize and maximize Puerto Rico assets…we are going to be putting together, complex financial transactions with the collaboration of other key government stakeholders including Chief of Staff & [Office of the Chief Financial Officer] OCFO Raúl Maldonado or Secretary of State Luis G. Rivera Marín, which will move the needle to continue bringing the right capital to Puerto Rico and fostering economic activity.”

Back to his roots

Truth be told, the move makes great sense for Puerto Rico because Portela cut his teeth on the investment side of the equation. The new CIO is armed with a master’s degree in strategy and finance from the University of Virginia and spent a large part of his career—15 years—as an investment banker.

Although it would seem that 18 months spent on the opposite side of the table in rather difficult negotiations and renegotiations with creditors under the Puerto Rico Oversight, Management & Economic Stability Act’s (Promesa) Title III and Title VI proceedings might not be a sterling calling card, he intends to use that experience to his benefit. “I am using my experience from the past year and half in leading all the efforts in the restructuring business of Puerto Rico and coupling that with my experience as an investment banker to take over the left side of the balance sheet. And continue, in collaboration with key government officials previously mentioned, maximizing Puerto Rico’s assets to create jobs and bring investment to Puerto Rico,” he explains.

“What is very important is that we are going to take this office of the CIO as sort of a centralized hub for senior investments and capital markets, players and other local and foreign investors to come and contact us if they have any ideas on these assets or any other assets. They have an office that has the financial experience to engage these investors, closing transactions,” Portela adds.

Now, the newly created CIO will work hand in hand with CFO & Chief of Staff Maldonado; Economic Development Secretary Manuel Laboy; Secretary of State Rivera Marín; Puerto Rico Housing Secretary Fernando Gil, because of Community Development Block Grant (CDBG) Disaster Relief Funds coming down the pike; and with the Puerto Rico Financial Oversight Management Board’s revitalization coordinator, Noel Zamot, for possible inclusion under Title V of Promesa for the development of critical infrastructure projects. The group, he said, meets weekly.

“Remember this is a team effort—my role is focused on the specifics of the transaction; we are not here to operate agencies—we are a transaction-oriented team,” Portela says. “We are sort of creating an investment banking shop right here in La Fortaleza so we can take a look at these specific transactions and identify viable solutions to them—some of which, for decades, have not found a comprehensive, holistic solution to them. We are following a simple three-pronged approach, first, to understand the assets and different optimization alternatives; second, to bring senior and serious investors to Puerto Rico; and third, evaluate and execute those ideas that bring the maximum return to the people of Puerto Rico.

“Basically, if investors have an idea, they can contact this office to present innovative proposals for large-scale and transformational projects for governmental assets. If such proposals are considered feasible and beneficial to Puerto Rico and, at the same time, aligned with the governor’s public policy, we will execute such an idea and close that deal—we will inject money into the economy and create jobs for Puerto Rico.”

Low-hanging fruit

Do you have any overlap with Fafaa in your work right now?

“No, right now we are working on these three main emblematic, transformative assets—Roosevelt Roads, the Port of Ponce and the [Convention Center] District Authority, but there are other assets we are looking at,” Portela assures.

While he did not explain exactly what the plans were with the three assets, at least two of them have encountered issues in efforts to make them profitable.

Since the Naval Station at Roosevelt Roads closed in 2004, the government has been trying to redevelop the area to bring an economic boost to eastern towns. The closing of Roosevelt Roads caused a loss of $300 million a year to the local economy and thousands of direct and indirect jobs, including 3,000 at the base alone. When Amazon was looking for a site to build its headquarters, the current government proposed Roosevelt Roads. Recently, the Local Redevelopment Authority (LRA) for Naval Station Roosevelt Roads, which is overseeing the property closed by the Navy, issued a request for proposals (RFPs) to manage the electrical distribution system at the former military base and operate an independent microgrid to supply the power needed by the premises’ 15 current and future tenants.

The selected energy distribution or generation providers would be required to finance, develop, construct, operate and manage the projects on the 3,409-acre property. The former military installation includes an airfield with an 11,000-foot runway, and areas controlled by the U.S. Army Reserve, Coast Guard and Department of Homeland Security, as well as a marina, a school, law enforcement agencies and several offices.

When asked about the proposed microgrid, Portela said there have been some proposals submitted to the LRA, which his office will analyze, and “if they add value to Roosevelt Roads, then we will have positive advice on them.” Asked how many jobs he believes will be created at Roosevelt Roads, Portela said, “We are still analyzing these assets…. We are going to provide a thorough assessment in the near future.”

Asked about the lack of investment in Roosevelt Roads, Portela said he did not want to focus on the past but on the future. “I have had experience with large, complex transactions. This asset has a prime location and we are starting to provide our financial information and that gives us some credibility,” he said.

Just as happened with Roosevelt Roads, different administrations have tried to develop the Port of Ponce to no avail. In January, the central government gave Ponce and Mayor María Meléndez control of the port, so they could engage in activities that could help boost the economy on the southern side of the island. But Portela said that if he can find a private operator to manage the port and bring jobs, then “why not? That is a hypothetical example.”

Of the three, the Convention Center District is the most profitable, as it includes restaurants, hotels and stores and the Convention Center itself has hosted more than 6,000 events and 3,000 groups attending national and international conventions, congresses, exhibits, conferences and sample fairs since opening at the end of 2005.

The construction of digital studios is underway. With a $70 million investment, the project is expected to create 150 direct and 200 indirect jobs during its construction. The development consists of five sound studios, administrative offices and conference rooms, as well as post-production and editing facilities, dressing rooms, storage space, an industrial kitchen, a “university” and laundry services.

Could you tell us how much Puerto Rico has in assets, Caribbean Business asked. “Well, I have only been in the role for three weeks and I am focusing on these three emblematic transactions—Roosevelt Roads, Ponce Ports and the [Convention Center] District Authority, but there are also other assets that we are analyzing. We are only in the due diligence phase and I will have more information on the prioritization as to how we go about optimizing these specific assets and other assets of Puerto Rico.

Obstacle course

One of the problems in attracting investment is the cost of power and its unreliability. Fiscal oversight board Chairman José Carrión noted that a preliminary agreement reached with Prepa bondholders, the second one agreed upon in three years, will help the economic development of Puerto Rico because a resolution to the public utility’s $9 billion debt is a needed step to attract private capital to transform the power company and eliminate the uncertainty created by the Title III bankruptcy process.

Carrión said the transformation of Prepa will occur with the significant post-Hurricane Maria federal aid to build with resilience, greater operational efficiency via the granting of electric transmission & distribution (T&D) concessions; and a more cost-effective combination of power generation that allows for providing electric service at a lower cost.

How do you attract investment to Puerto Rico when Prepa has become this poster child for dysfunction throughout the world thanks to all the global coverage it received after the devastation wrought by Hurricane Maria. How do you address those concerns, Caribbean Business asked.

The new fiscal plan that was delivered to the oversight board a couple of days ago has an energy reform as part of the reforms the governor has emphasized, Portela said. “One of the objectives is to provide clean, effective and cheap energy. That is why there is a working group that is dedicated to Prepa, that is working through[Fafaa] and [Prepa Executive Director] José Ortiz and the [fiscal oversight] board to convert Prepa into Prepa 2.0 with private generation and concessions for T&D. Thus providing clean, effective energy to Puerto Rico—cheap energy would correlate with productivity in any country. It is an important step,” he said.

Is it a question investors ask—a concern—when you are out selling, Caribbean Business asked.

“They always ask. Remember that we are still in the due diligence phase. And as a prudent professional, and a prudent public official, I need to study those assets correctly. As a very preliminary initial assessment, there are a lot of opportunities for these assets. In the next weeks we will be providing more information on the prioritization of these assets and what things we are looking at,” he said.

According to the CIO, Gov. Ricardo Rosselló is expecting an analysis of the assets that could be optimized by Dec. 3. Portela is holding meetings with potential investors this week in New York. He said one of the elements that attract investors are “opportunity zones. The entire island is an opportunity zone and we will be working with the [CFO] & Chief of Staff Raúl Maldonado to see how these projects can best benefit from the opportunity zones,” he stressed, noting the amount of federal funding assigned to Puerto Rico.

These investors will possibly be able to have their projects fast-tracked because of the “ease of doing business” in the fiscal plan.

While President Trump’s tax reform has hurt the island as an investment destination for stateside-based companies, Portela said the government will work with what it has and seek to make the law more favorable.

“We are going to have a code that deals with those incentives. If it is positive for Puerto Rico, we will provide incentives. If it is not positive for Puerto Rico, we will not provide incentives,” he said. “The whole entire island is an opportunity zone. We are going to get $20 billion in CDBG funding. I believe those are very big incentives…. And there is going to be an office that will be dedicated to investors.”

Asked how he would pitch Puerto Rico to investors? “We are not in the pitch phase right now. I am talking to different parties. We have not done the formal pitching of these assets yet,” he said.

Responding to a question from Caribbean Business, Portela disputed the idea that Puerto Rico has not been transparent with its numbers, noting that the island’s remaining audited financial statements would be published before the end of this year. “We are publishing the TSA cash flow. We are providing information on public corporations, attendance and public employees, on pensions, on budget to actuals. This information takes time. We have over 100 agencies. To be honest, our governor has done a lot of good things toward transparency,” he said.

Given Portela’s tenure at Fafaa, Caribbean Business asked about his perspective on the Cofina deal. One of the deals will split Cofina revenue between the agency and the commonwealth, and a second preliminary deal will divide its revenue between senior and subordinate Cofina creditors.

“It is very important to start negotiating all of the debt of Puerto Rico. I worked on the Cofina deal, I worked on the Prepa deal, the GDB deal. And there are some other credits that will be coming in soon; these could be possible candidates for Title VI. We will also improve the confianza [trust] and the credibility Puerto Rico used to have; the governor and all of us have improved that perception of Puerto Rico,” he said.

What other negotiations do you see going to Title VI, Caribbean Business asked. Portela mentioned that he believed the Puerto Rico Aqueduct & Sewer Authority [Prasa] and the University of Puerto Rico (UPR) will end up going to Title VI, where creditor groups can consensually agree to a deal with the debt issuer, dragging nonconsenting holders along, to seek a plan of adjustment under a Title III proceeding.

“Well, I can’t get into specifics; we know which ones are in Title III—GOs, Cofinas, HTA [Puerto Rico Highways & Transportation Authority] and ERS. GDB was the first Title VI to be included—the RSA [restructuring support agreement] should be closing sometime in October. There are other opportunities that are not in Title VI, but they could be candidates for Title VI—Prasa, UPR, for example,” he said.

Unsecured creditors sue to stop Puerto Rico GDB restructuring deal

SAN JUAN – The Committee of Unsecured Creditors has sued in federal court to stop the plan of adjustment of the Puerto Rico Government Development Bank’s (GDB) debt under the consensual resolutions Title VI of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa).

In an adversary proceeding submitted late Thursday, the Committee said that under the GDB deal, former bank officials and advisers would be exempt from liability over the island’s public debt. The GDB was the government’s financial adviser.  

“Long before the commencement of these Title III [debt adjustment] cases, the Government Development Bank for Puerto Rico…as financial advisor to the Title III Debtors, was the architect with various financial institutions of many of the financial maneuvers that led to the Title III Debtors’ current fiscal crisis,” the committee said.

As a result of the fiscal crisis, GDB was operationally wound down and ceased operations more than a year ago, but former GDB employees remain involved in Puerto Rico’s restructuring efforts.

“Indeed, current and former GDB insiders are now (i) members of the Oversight and Management Board for Puerto Rico (the ‘Oversight Board’), (ii) officers of the Puerto Rico Fiscal Agency and Financial Advisory Authority (‘AAFAF’), (iii) managing directors of AAFAF’s financial advisor, or (iv) the executive director of a GDB bondholder group supporting the transaction (the so-called ‘Bonistas Del Patio’ whose executive director is former GDB head Jorge Irizarry). These individuals would prefer that this Court ‘bury’ GDB before the Committee and other interested parties have the opportunity to perform the autopsy,” the committee said.

The Government Development Bank for Puerto Rico (CB file)

The committee stressed that the government is attempting to restructure all of GDB’s debts and liquidate its assets outside of Title III proceedings.

The GDB’s debt adjustment contemplates the restructuring of its unsecured bondholders’ and certain depositors’ claims through a “qualifying modification” binding on all bondholders under Title VI, the group said, for which GDB has already sought approval.

“The claims of the Title III Debtors and certain other government depositors are not being restructured as part of the purported Qualifying Modification. Rather, their claims are being restructured solely through transactions to be effectuated pursuant to the GDB Restructuring Act, which purports to release any rights or claims of the Title III Debtors against GDB or its current or former officers, directors, employees, agents, or representatives (collectively, the ‘GDB Releasees’) and to deprive the Title III Debtors and any other government entities of standing to challenge the GDB Restructuring,” the committee wrote.

However, even if no potential liability claims against the GDB officials were allowed, other claims by debtors against the bank are also not allowed, the group said.

The committee said the deal would offset the public funds deposited with GDB by the Title III debtors against GDB’s “alleged outstanding loans” to those debtors, transfer all of the valuable assets at GDB, much of which consists of deposits of public funds to the Recovery Authority, and release the entity and GDB releasees from claims that could be brought against them by the debtors.

The group wants to invalidate the deal, contending it goes against Promesa because only bondholders can invalidate claims, and that the law cannot be preempted.

“The Commonwealth cannot enact its own liquidation statute because any such statute would be preempted by Promesa pursuant to the Bankruptcy Clause. The GDB Restructuring Act amounts to a de facto bankruptcy law that discharges or otherwise extinguishes most claims against GDB, transfers all of GDB’s assets to other entities, and exists in the same area covered by Title III of Promesa,” the committee said.  

The group also took issue with the report commissioned by the Financial Oversight and Management Board on the causes of the island’s debt.

Puerto Rico group says further inquiry on public debt needed

Puerto Rico group says further inquiry on public debt needed

SAN JUAN – A group of unsecured Puerto Rico creditors urged the U.S. District Court to be skeptical of claims by the island’s Financial Oversight and Management Board that its final report on the causes of the commonwealth’s public debt uncovered everything and should serve to prevent further inquiry.

The Official Committee of Unsecured Creditors of all Title III Debtors, other than Cofina (Spanish acronym for Sales Tax Financing Corp.), said that additional work is needed in light of the findings and that the report focuses more on exonerating officials and companies for their actions instead of holding them accountable.

Title III refers to the section of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) that covers in-court restructurings of Puerto Rico and its instrumentalities.

(CB file photo)

The group criticized the firm hired to conduct the investigation, Kobre & Kim, for choosing to offer anonymity to the subjects, which it said, “means that the Final Report may turn out to be of very limited utility. None of the Investigator’s interviews were conducted under oath or even transcribed—something that not only allows interviewees to evade crucial issues, but also frustrates any efforts to utilize the statements they gave.”

On Aug. 29, The fiscal oversight board said it intends to create a Special Claims Committee to pursue demands stemming from the report and hold a hearing Sept. 18.

“However, there is no reason to expect the Special Claims Committee’s approach to be any different than the approach undertaken by the Investigator—as three of the four members on that Special Claims Committee were the very three members of the ‘Special Investigative Committee’ that oversaw and directed the Investigator’s work and presumably approved the issuance of the Final Report,” the committee said.

The creditors made a list of observations for further investigation. Among them is that the report identifies that the Government Development Bank (GDB) served as the “epicenter and effectively controlled” all of the government borrowing practices. However, the GDB restructuring deal that will go to court for approval exempts former GDB officials from any possible wrongdoing.

“Given that background regarding the GDB’s central role, the importance of viewing the Final Report with a wary eye is highlighted even more clearly by the government’s recent efforts, with the Oversight Board’s apparent approval, to steamroll any opposition to the GDB’s Title VI restructuring and effectively bury the GDB as quickly as possible. Even though that restructuring process would result in a global release of the Title III Debtors’ claims against the GDB and the GDB’s current or former officers, directors, employees, agents, or representatives,” the committee stressed.

The report spends nearly two pages discussing why GDB officials were “knowledgeable and well-credentialed—an issue entirely irrelevant to whether those individuals breached any fiduciary duties or were negligent in their administration of GDB’s role as a fiscal agent for the Commonwealth.”

The committee pointed out that fiscal board advisers have stated that “it is beyond credulity that the Commonwealth, HTA [Puerto Rico Highways and Transportation Authority], and PREPA [Puerto Rico Electric Power Authority] can have meritorious claims against the governmental entity that loaned them money and kept them afloat at the request of the Puerto Rico government.”

While the report spends 52 pages providing an overview of various types of claims that often arise in bankruptcy cases, it does not “apply the law to the facts nor offers” the possibility that “certain claims may exist in theory without meaningfully linking them to specific individuals or supporting documentation,” the group said.

Nor does the report address, the group said, questions of whether any of the entities currently under bankruptcy could file “avoidance actions,” which are actions dealing with fraudulent transfers or payments that “should not have been made to recuperate the funds, even though the statute of limitations for such actions is next May.”

The debt investigator similarly does not directly address questions concerning whether the constitutional debt limit was ever exceeded, the creditors said, adding the issue is crucial to determining whether certain bonds “are subject to challenge or if a transaction caused the island to exceed its debt limit. Instead it says the island used a robust process” to calculate debt limits.

“Moreover, with very limited exceptions, the Final Report avoids the question of whether private financial institutions should be held liable for their interactions with the Title III Debtors—instead focusing on process-oriented ‘fixes’ or forward-looking prescriptions,” the committee said.

“Likewise, despite characterizing the various derivative swaps that were entered into by the Title III Debtors as highly risky—and even possibly leading to a downgrade in the Commonwealth’s credit rating in 2007—the Final Report does not thoroughly analyze whether private parties, including outside advisors, could be liable for these transactions, and instead discusses whether the swaps were in ‘the best interests of Puerto Rico,'” the committee said.

“Even where the Final Report attempts to address claims, it takes an approach that virtually ensures that responsibility will not be laid at any party’s feet,” the committee reiterated.

‘Piggy bank’

According to the committee, the report “largely ignores” the implications of the “revolving door issue” because it did not find evidence of “bribery, kickbacks, or pay-to-play violations in connection with any Puerto Rico-related bond issuance. Of course, it is not necessary to prove that ‘bribes’ or ‘kickbacks’ were offered in order to establish that fiduciary duties were breached in the selection of financial advisors or underwriters based on potential favoritism (political or financial), and the Investigator’s assumptions on this point preclude an in-depth analysis of potential recoveries. This is particularly troublesome given the government’s efforts to grant global releases and immunity to GDB” officials.

The investigator said swap transactions should be examined because GDB officials were not aware of what swaps had been entered into by the debtors.

“Indeed, in order to inventory its total exposure, GDB had to hire an outside swap advisor in 2009 who literally called swap counterparties on the phone over the course of months to ask…if they had trades with Puerto Rico-Related Entities. And GDB failed to meaningfully consider whether swap termination fees should be counted for the purposes of the constitutional debt limit,” the committee said.

In addition, the creditor group asserted, GDB officials neglected to perform “sufficient due diligence” for the loans it provided, turning the bank into a “piggy bank” for instrumentalities, which led to its eventual restructuring.

Unsecured Puerto Rico creditors may reject GDB restructuring deal

Puerto Rico may be liable for incomplete Cofina, GO bond disclosures

Editor’s note: The following originally appeared in the Aug. 23, 2018, issue of Caribbean Business.

The Independent Investigator’s report on the causes of Puerto Rico’s debt devoted numerous pages to the potential liability against the government, most notably its failure to disclose problems with the structure of the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) and the 2014 general-obligation (GO) bonds.

The independent investigator’s report said the government should have also disclosed legal opinions that put in question the legality of Cofina’s structure. It also should have disclosed that it had hired professionals with reputable restructuring experience a month before the 2014 GO bond issue, which was the last time the government went to the markets.

On March 11, 2014, just over one month after Puerto Rico’s bonds were downgraded to junk status, Puerto Rico issued $3.5 billion in GO bonds. The risk factors section of the 2014 GO Bond Official Statement begins by warning that the “Commonwealth and its instrumentalities face a number of fiscal and economic challenges that, either individually or in the aggregate, could adversely affect the Commonwealth’s ability to pay debt service on the bonds when due.”

Several witnesses involved with the 2014 GO bond issuance told investigators that the risk-factor section of the 2014 GO Bond Official Statement was extensive and thorough, and included the possibility of a debt restructuring.

In addition, according to the witnesses, the bond denomination was $100,000, which served to protect unsophisticated investors from buying the bonds, the report said.

Despite the apparent lack of plans to restructure and the absence of a legal mechanism for Puerto Rico to restructure at that time, the Government Development Bank (GDB), the island’s fiscal agent, hired Millco, Cleary and Proskauer Rose prior to the 2014 GO bond issuance. Millco was a reputable restructuring firm and both Cleary and Proskauer were law firms with reputable restructuring practices.

Despite Millco’s statement that it was not hired to provide advice for restructuring of Puerto Rico obligations, the report said one witness noted that several underwriters requested disclosure of the Millco hiring in the GDB’s liquidity projections, which were ultimately referenced in the Official Statement of the 2014 bond issue. However, the independent investigator noted the island should have disclosed in the bond issue report the hiring of law firms with restructuring experience. “We found that even though Puerto Rico had disclosed with the 2014 GO Bond Issuance potential emergency measures, including a restructuring, Puerto Rico did not disclose that it had retained law firms with reputable restructuring capabilities on Feb. 3, 2014, [which was] just over one month before the bonds were issued,” said the report, which was written by Kobre & Kim.

Witnesses who worked on the bond issuance stated that Cleary was not hired in January 2014 to conduct a debt restructuring, but to advise on alternatives for various contingency scenarios with respect to Puerto Rico and its agencies. A witness also stated that issuers typically do not disclose the names of the law firms they hire.

However, on June 28, 2014, the Recovery Act was enacted, which established a restructuring regime for certain issuers, including public corporations. “Witnesses told us that Cleary and Proskauer helped draft this legislation. One investment banker and an underwriter reported that Puerto Rico did not tell underwriters that it had retained Cleary in the time between the engagement and the time it was made public. Another banker reported he was very surprised to learn in April that Cleary had been hired, and was shocked to learn in May 2014 about the consideration of the Recovery Act. The witness stated the underwriters were completely surprised to learn about the restructurings, as were the rating agencies and the market. The witness reported he told GDB personnel that he thought the restructurings were a violation of representations Puerto Rico had made to investors about its commitment to honor its [GO] debt,” the report said.

On the other hand, the Cofina bond issues created significant controversy after Puerto Rico became unable to pay its debts. Certain creditors, including holders of Puerto Rico’s GO bonds, challenged the transfer of sales & use tax revenues to Cofina because they say the funds should have been used to satisfy amounts owed on their GO bonds. Among other things, the creditors asserted Cofina was created to circumvent Article VI of Puerto Rico’s Constitution, which they claim gives them a Clawback Right.

In June, Cofina and holders of GOs reached an agreement to settle their dispute.

Cofina was created in 2007 with the idea of using a dedicated revenue stream from a new sales & use tax to back bonds that would, because of the source of that revenue, be a safe investment. Cofina ultimately issued bonds in 2007, 2008, 2009, 2010 and 2011.

Before the first issuance of Cofina Bonds, there were questions about the legality of its structure. At the GDB, there were internal discussions about the “clawback risk,” or the risk under the Puerto Rico Constitution that the sales & use tax revenue could be subject to the Clawback Right of GO bondholders because the proceeds from this revenue stream could not be diverted from the general fund. On the subject, Cofina’s underwriters ultimately said that if a dispute were to come before the Puerto Rico Supreme Court, the sales tax securitization structure would be found to be constitutional and does not violate the GO bondholders’ priority rights under the Puerto Rico Constitution.

“Publicly available evidence reflects that sometime prior to mid-March 2006, at least one attorney had advised the GDB that, under the Puerto Rico Constitution, the sales & use tax could not be diverted away from the general fund,” the report said.

Sidley Counsel, who had long served as bond counsel for Puerto Rico-related bond offerings, said in a May 2007 email to Jorge Irizarry, who was the GDB head at the time, that a court would have a hard time concluding the sales-tax revenues are not “available” to the Commonwealth should it need the money to pay GO debt.

Sidley Counsel, as a matter of fact, declined to provide a legal opinion concluding that if the issue were to come before the Puerto Rico Supreme Court, the sales tax securitization structure would be held constitutional and not be found to violate the GO bondholders’ priority rights under the Puerto Rico Constitution. In a subsequent email, Counsel recommended adding language to the investor disclosure on bond issues reflecting the lack of judicial approval of the proposed securitization structure. However, Cofina opted to retain the Hawkins law firm as bond counsel to provide an opinion that the sales & use tax pledged to Cofina did not constitute the “available resources” of Puerto Rico.

While Act 91, which created Cofina, has not been challenged in any court of law, none of the Official Statements for the 2007 through 2008 bond issuances includes the additional language that Counsel had recommended concerning the uncertainty in that area. The language was included in the Series 2009 Cofina bonds as a risk factor.

“The earlier Cofina issuances in 2007, 2008 and 2009 raised questions about potential material misrepresentations and omissions relating to the failure to disclose discussions about the constitutionality of the Cofina structure and Puerto Rico’s existing long-term bond counsel’s refusal to issue an opinion concerning Cofina,” the report said.

In 2010, Nixon Peabody replaced Hawkins as bond counsel for Cofina for bond issuances between 2010 and 2011. During an investor call—a public conference call hosted by the GDB to discuss the opinions shortly after their issuance—lawyers with Nixon Peabody and PMA (Puerto Rico-based underwriters’ counsel) suggested that Cofina could not seek judicial review of the constitutionality of its structure because no case or controversy existed for the court to review.

“These statements may not have provided all potentially relevant information, because a declaratory judgment action or petition for writ of mandamus to determine the constitutionality of Cofina may have been viable. In fact, Puerto Rico has had a declaratory judgment mechanism since 1979,” the report said.