Unsecured creditors challenge 2011 Puerto Rico bond issuance

The U.S. District Court for the District of Puerto Rico (CB file photo)

Committee contests about $1 billion; says insurer Ambac supports suit

SAN JUAN — The Unsecured Creditors Committee (UCC) in Puerto Rico’s bankruptcy-like proceedings is challenging about $1 billion in general obligation bonds (GOs) issued in 2011 that remain outstanding, contending they were underwritten in violation of constitutional debt limits.

In its objection, filed May 21, the UCC said Ambac, which insures billions of dollars in Puerto Rico bonded debt, supports the challenge. The UCC has joined the island’s Financial Oversight and Management Board in challenging the legality of some of the commonwealth’s debt, including $6 billion in GOs issued in 2012 and 2014.

On March 17, 2011, the commonwealth issued $442 million in Public Improvement Refunding Bonds, considered GOs, to repay advances made to the commonwealth under a line of credit from the island’s Government Development Bank (GDB) and to pay interest on the bonds themselves. On July 12, 2011, the commonwealth then issued $304 million aggregate principal amount of Public Improvement Bonds of 2011.

On that same day, the commonwealth also issued $52 million in the aggregate principal amount of Public Improvement Refunding Bonds and $245.9 million in the aggregate principal amount of Public Improvement Refunding Bonds that were issued, among other reasons, to fund termination payments under certain interest rate swap agreements.

“For many years leading up to the Petition Date, the Commonwealth was running a structural deficit, i.e., recurring revenues were insufficient to cover recurring expenses. Rather than balance the budget by raising taxes and/or reducing spending, the Commonwealth borrowed money from GDB and bondholders to fund annual operating expenses and debt service,” the UCC said.

Of the 2011 GOs, about $412.5 million in net proceeds was used to refinance GDB credit lines to finance deficit spending by paying interest on GOs. Some $260 million in net proceeds was used to refund other bonds, “including Commonwealth GO bonds that indirectly financed deficit spending by refunding Commonwealth GO bonds the proceeds of which were used to pay debt service on other Commonwealth GO bonds and by paying a portion of $88 million in advances under a GDB line of credit.”

The commonwealth’s average internal revenue for the prior two fiscal years (2009 and 2010) was $7.32 billion.

“With the issuance of some of GO Bonds, the maximum debt service in any fiscal year (including PBA [Public Buildings Authority] Bond debt service) was $1.1092 billion in 2012, which is more than 15% or 15.2% to be precise of the Commonwealth’s average internal revenues for the prior two fiscal years,” the UCC said, referring to constitutional debt limits.

The UCC and the fiscal board separately claim the PBA is a “sham” structure to divert the Puerto Rico Constitution’s debt limits.

Puerto Rico creditor group defends validity of Public Buildings Authority bonds

(Screen capture of www.sbdonline2.net/aep)

But argues commonwealth’s debt limit was breached

SAN JUAN – The Lawful Constitutional Debt Coalition supported attempts to declare invalid $6.2 billion in Puerto Rico general obligation bonds issued in 2012 and 2014 because they violated debt limits but defended the validity of Public Buildings Authority bnonds.

The coalition, which includes holders of general obligation bonds and PBA bonds issued before 2012, nonetheless said $582 million in government facilities revenue refunding bonds issued by PBA in 2012, some $78.1 million in bonds issued by the Puerto Rico Infrastructure Financing Authority (Prifa) in 2015 and $233.6 million issued by Ports of the Americas in 2014 are illegal as well because, as commonwealth guaranteed debt, they should have counted toward the debt limit. The information is contained in filings Thursday by the coalition.

In January, the island’s Financial Oversight and Management Board and the Unsecured Creditors Committee filed a lawsuit to declare invalid some $6 billion in general obligation bonds issued between 2012 and 2014. Both called the PBA a sham used to issue debt that was not in the commonwealth’s name but payable through general revenues so it does not get post petition rent payments.

In December 2018, the UCC and the fiscal board filed a complaint seeking a declaration that certain leases between the PBA and agencies are disguised financing mechanisms and that rent due is not subject to priority payment.

The coalition defended the PBA, which reports 615 properties under its jurisdiction, has capital assets totaling $3.7 billion and more than 1,000 employees who provide maintenance, administrative and operational services to its buildings.

Since its creation by the Legislative Assembly in 1958, no court has suggested that the PBA was unlawfully created. PBA issued bonds to finance the construction and maintenance of its buildings. The Commonwealth also guaranteed the payment of principal and interest on PBA bonds through guarantees issued in favor of PBA bondholders. The practice of guaranteeing PBA bonds began in 1968, 10 years after the PBA’s creation.

The PBA derives its revenue from rent paid by its tenants and is used to pay principal and interest on its bonds.

Three years after the PBA was established, and before the commonwealth began guaranteeing PBA bonds, the Puerto Rico Constitution was amended in 1961 to prohibit the commonwealth from directly issuing bonds backed by its full faith, credit and taxes if the combined principal and interest to be due, as well as similar “direct obligations of the Commonwealth for money borrowed directly by the Commonwealth evidenced by bonds,” exceeded 15 percent of the island treasury’s average annual revenue for the two previous years. The same limitation or “constitutional debt limit” was also imposed for any guarantee to be given by the commonwealth.

“The Commonwealth was able to issue GO Bonds and GO Guarantees in 2012 and 2014 only because it did not include the payments that the Commonwealth made to the PBA in the prior fiscal year for principal or interest on PBA Bonds when determining whether it had debt capacity in 2012 and 2014,” according to the document written by the firms Reichard & Escalera and Quinn Emanuel Urquhart & Sullivan, LLP

According to one of the firms, PBA debt was not included because the government interpreted the constitutional disposition to mean debt guaranteed by the commonwealth was counted only if the commonwealth failed to pay its rent.

“The Commonwealth’s failure to comply with this Constitutional mandate resulted in the issuance of approximately $6.7 billion of purported full faith and credit GO bonds and guarantees in 2012 and 2014 that violated the express terms of the Constitutional Debt Limit,” the document reads.

However, it said the PBA was validly created and its bonds are undeniably constitutional, serving important public purposes over the past 60 years.

“We believe recent efforts to mischaracterize PBA debt are predicated upon a fundamental misunderstanding of the public corporation’s history and a strained reading of Puerto Rico’s Constitution that adds words that are not there while omitting words that are. Since the passage of the PBA Enabling Act in 1958, both the Commonwealth and every court that has reviewed the matter have found that the PBA is not an arm of the central government, but rather a validly established and separate entity. Indeed, numerous states have mirrored the PBA structure to design, construct, and develop critical government buildings,” coalition representative Susheel Kirpalani, of Quinn Emanuel Urquhart & Sullivan, said in a statement.

“Although the Commonwealth has guaranteed the principal and interest payments on PBA bonds since 1968, prior administrations and their advisors improperly omitted payments made by the central government on account of these guaranteed bonds. It is important to underscore, however, that leases between the PBA and its tenants, including the Commonwealth itself, openly and appropriately defined a portion of the Commonwealth’s payments as ‘Debt Service Rent,’ removing any doubt as to how the central government should have accounted for those payments in the debt limit,” he said.

“Had the Constitution been faithfully applied, GO bonds and guarantees issued after March of 2012 could not have been backed by the Commonwealth’s full faith and credit,” he added.

Puerto Rico gov introduces bill to pave way for Cofina restructuring

SAN JUAN – Gov. Ricardo Rosselló Nevares introduced Thursday a bill that would put in effect the debt restructuring deal with creditors of the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym).

“I have always been firm in that the debt of Puerto Rico has to be reduced in terms that allow its repayment without affecting the services we offer the people. With this agreement, as we did with the debt of the Government Development Bank, we can regain the credibility that the last administration lost and resulted in the government bankruptcy, in addition to the imposition of the Financial Oversight Board,” the governor said.

Once enacted, the legislation will make possible the restructuring of Cofina’s debt under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa), which will reduce the government-owned corporation’s debt by 32 percent and result in savings of $17.5 billion in debt service payments.

“Puerto Rico will have access to an average of an additional $425 million per year for the next 40 years,” Rosselló Nevares stressed.

Under the deal, Cofina bondholders will exchange their bonds for new ones. Cofina senior bondholders are expected to recuperate 93 percent of the value invested and junior bondholders about 50 percent.

Puerto Rico has been in bankruptcy court since May 2017, trying to restructure about $120 billion in debt and pension obligations. Other parties in the Cofina deal, which would be Puerto Rico’s first debt-adjustment plan under the bankruptcy to seek court approval, include bond insurance companies, municipal bond funds and individual Puerto Rican bondholders.

This week, Puerto Rico bankruptcy Judge Laura Taylor Swain scheduled a hearing for Nov. 20 on the adequacy of Cofina-related information. The agreement is slated for approval in January.

Judge Swain to determine legality of Puerto Rico Sales Tax Financing Corp. bonds

SAN JUAN – U.S. District Judge Laura Taylor Swain denied Thursday against certifying questions to the Puerto Rico Supreme Court related to the legality of the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym), a crucial issue in a dispute with holders of commonwealth bonds.

The ruling means Judge Swain herself will decide the legality of Cofina and who owns the sales and use tax.

After hearing oral arguments in the dipute on May 9, Judge Swain ruled against allowing the top local court to make determinations into Cofina’s legality as requested by Cofina’s representative in the dispute, Bettina Whyte, arguing that Whyte ignored the issue arises from federal questions and not just purely Puerto Rican law, and that certifying the questions would delay the resolution of the proceeding under the Puerto Rico Oversight, Management and Economic Stability Act’s (Promesa) bankruptcy-like Title III.

On Aug. 10, the court approved an order authorizing the Official Committee of Unsecured Creditors and Whyte to serve as the commonwealth’s and Cofina’s agent, respectively, as part of a court proceeding to determine whether the sales and use taxes are property of Cofina or the commonwealth.

Whyte and other groups sought to certify certain questions to the Supreme Court to determine Cofina’s legality, arguing that the exercise involved the analysis of Puerto Rican law.

The commonwealth agent, the Financial Oversight and Management Board (FOMB), and the Ad Hoc Group of General Obligation Bondholders objected their efforts, arguing the analysis involves using federal bankruptcy law.

The issue of determining who owns sales and use taxes is important to determine what are the assets of the debtors and to be able to distribute debt.

Federal courts use the rules of the Supreme Court of Puerto Rico to determine if whether questions are referred to the commonwealth court. The federal court must determine if the controversy involves questions of Puerto Rican law; if the questions may determine the outcome of the case; if there are no clear precedents and if the case makes an account of all the facts relevant to said questions showing clearly the nature of the controversy giving rise to the questions.

“Although the issues raised by the Commonwealth-COFINA Dispute are novel and are of great importance to the people of Puerto Rico, the parties seeking certification characterize the scope of the issues before the court too narrowly and ignore the federal bankruptcy context in which the Commonwealth-COFINA Dispute arises,” Judge Swain said.

While the judge also found that Whyte did not waive her right to seek certification by proceeding with a motion for summary judgment motion because that was needed to frame the questions correctly, she said that to resolve the central question of ownership of the sales and use tax, the court will have to use federal bankruptcy law arguments raised by the parties.

Certification is also unwarranted, Judge Swain said, because it would delay the resolution of the dispute, impede progress toward a plan of adjustment and postpone the conclusion of the Title III proceedings.

“Although the parties present differing views on the speed with which the Supreme Court of Puerto Rico would reach a decision on the proposed questions if certified, certification will at least entail another round of briefing and argument and…any decision by the Supreme Court of Puerto Rico would still be subject to further bankruptcy law considerations as to what ultimately constitutes property of which debtor under PROMESA and various incorporated Bankruptcy Code provisions,” she added.

Daniel Patrick Moynihan U.S. Courthouse (edenpictures on VisualHunt)

Tough sledding ahead for GO-Cofina settlement

State Street Global Advisors’ “Fearless Girl” from McCann NY (Anthony Quintano on Visualhunt)

Editor’s note: The following article originally appeared in the May 17-23, 2018, issue of Caribbean Business.


In matters pertaining to Puerto Rico’s debt crisis, the devil is in the fine print. Thus, the footnotes in the recently announced Commonwealth-Cofina Joint Settlement suggest a deal is far from cemented, as significant creditor constituencies are listed in the footers as parties either excluded from the deal or harboring reservations pending outcomes of legal challenges that remain in place.

Although the deal brings to the table two of Puerto Rico’s most important creditor constituencies that have been in a legal harangue over the priority of their credits, the Unsecured Creditor Committee (UCC) representing general unsecured claims is reluctant to participate in the exchange.

“The UCC has been very unconstructive and have refused to participate,” one Wall Street source with knowledge of the negotiations told Caribbean Business. “When you get the principles talking, there is progress, but lawyers who are advising the unsecured creditors want to do all the negotiating and nothing gets done.”

It is not the first time legal advisers have come between sides in negotiations tied to debt crisis. In Argentina’s debt crisis, some of the hedge funds involved had more lawyers on staff than analysts and made a killing in billables in cases that took a decade to resolve.

There are eight members on the UCC, which was appointed in June 2017 to represent the interest of all general unsecured creditors of the commonwealth, the P.R. Electric Power Authority, Employees Retirement System and Highways & Transportation Authority.

The members are the American Federation of Teachers, Drivetrain LLC as the Creditors’ Trustee for Doral Financial Corp., Genesis Security Services Inc., Peerless Oil & Chemicals, P.R. Hospital Supply, Service Employees International Union, Total Petroleum P.R. Corp. and Unitech Engineering Group S.E.

The UCC is not the official committee of unsecured creditors for Cofina.

–Read the rest of this story in Caribbean Business’ epaper here.

Puerto Rico gov’t objects to creditor request for probe into debt

SAN JUAN – The Puerto Rico government objected to a request made by a group of creditors that the causes of the island’s financial crisis be investigated, arguing that such an undertaking should be carried out by the commonwealth’s Financial Oversight & Management Board.

The committee—which represents unsecured creditors in Puerto Rico’s bankruptcy cases—recently asked federal Judge Laura Taylor Swain to authorize discovery to determine the role played by Banco Popular, Banco Santander and the Government Development Bank (GDB) in relation to debt obligations burdening Puerto Rico.

Last week, Judge Swain issued an order referring the unsecured creditor committee’s request to Magistrate Judge Judith Dein. The matter will be addressed Aug. 9 as part of the omnibus hearing that will be held in San Juan on the commonwealth’s Title III bankruptcy proceedings.

“While [Puerto Rico Fiscal Agency & Financial Advisory Authority, or Fafaa] recognizes that there will be a time and place for such an investigation, the time is not now, and the Committee is not the party to conduct it,” the government’s response adds, noting that the federal Promesa law already empowers the fiscal board to investigate.

Order for discovery into causes of Puerto Rico’s fiscal crisis to be discussed

The commonwealth government also notes Section 104 of Promesa, which says that the board “may investigate the disclosure and selling practices in connection with the purchase of bonds issued by the Government of Puerto Rico for or on behalf of any retail investors including any underrepresentation of risk for such investors and any relationships or conflicts of interest maintained by such broker, dealer, or investment adviser is as provided in applicable laws and regulations.”

Fafaa also states in the objection filed July 31 that the committee’s request was “overly broad and burdensome, distracting and unnecessary.” 

“The requests would result in the incurrence of millions of dollars of unnecessary professional fees and divert resources of [Fafaa], GDB, and other Commonwealth instrumentalities during this critical time,” the government adds.

In reference to the dispute among general obligation (GO) and Sales Tax Financing Corp. (Cofina) creditors, the motion adds that the committee’s attempt to obtain extensive discovery regarding the substance underlying the Commonwealth-Cofina dispute was improper. The government says the GO-Cofina conflict—who gets paid first and who is entitled to certain sales tax revenue pledged to Cofina debt repayment—”will be litigated imminently,” pursuant to a stipulation recently reached among the government and certain major creditor groups.

If approved by Judge Swain, the parties would litigate the issue in a bid to reach a court-ordered resolution by Dec. 15.  The agreement still lacks who will act as agent representing Cofina creditors.

The government argues it “must be evenhanded in providing information to the parties who will litigate the Commonwealth-Cofina dispute.” It adds it would be “unfair” to allow discovery to the unsecured creditor committee without a Cofina agent in place.

“When he or she is appointed, [Fafaa] will work with that person and the Committee to establish a fair, efficient, and streamlined discovery process rather than respond to piecemeal requests,” the commonwealth states.

The investigation petition filed July 21 by the committee states that the group seeks “to learn the role of public and private financial institutions in the structuring, underwriting, repackaging, and selling of the debt obligations that are now burdening Puerto Rico.”

—Luis J. Valentín Ortiz contributed to this report. 

Aafaf Objection to Motion for Discovery (Text)

Puerto Rico municipalities ask Judge Swain to appoint committee

SAN JUAN — Eleven Puerto Rican municipalities are asking federal Judge Laura Taylor Swain to appoint an official committee that represents the island’s 78 towns in the island’s bankruptcy proceedings under Title III of the federal Promesa law.

They contend towns should be treated differently in the commonwealth’s debt-restructuring process than other creditors.

According to court documents filed Friday, the U.S. Trustee had rejected creating a committee to represent the island’s towns. To date, only two committees have been officially appointed by the court, representing unsecured creditors and retirees.

Puerto Rico Senate president puts municipalities at top of agenda

The motion was filed by an ad hoc committee of municipalities that comprises Mayagüez, Isabela, Quebradillas, Guayama, Cabo Rojo, San Germán, Adjuntas, Guayanilla, Guánica, Añasco and Barceloneta.

In justifying their request, the towns noted that the commonwealth used to direct more than $450 million in subsidies to the municipalities on a yearly basis.  The current budget only provides for $220 million, after the island’s financial control board called for cuts to these subsidies.

“Promesa establishes separate grounds for a committee, given the substantial claims which the municipalities have against not only the Commonwealth but several of its instrumentalities.  This Court’s directing the appointment of an Official Puerto Rico Municipalities Committee is legally appropriate and critical to the success of the reorganization effort,” the motion further says.

The towns further argue that cuts in their budgets, combined with the actions of the Government Development Bank over municipal deposits and loans, have made it impossible for them to access financial markets to provide services.

Puerto Rico GOs denied intervention in Cofina dispute

What’s more, the motion says that the dispute between general obligation (GO) bondholders and Sales Tax Financing Corp. (Cofina by its Spanish acronym) bondholders over the entitlement of the island’s sales tax revenues is also having an adverse impact on municipalities.

“The Puerto Rico Municipalities have an important and vested interest in the Title III Petitions because any plan of adjustment, and the budgets mandated by that plan, will directly affect each and every Municipality,” the document adds.

According to the towns, the U.S. Trustee declined the ad hoc municipalities committee’s request for the appointment of an Official Municipalities Committee because they are “government units” not “persons.” But the ad hoc committee says the U.S. Bankruptcy Code allows for the creation of the official committee, which would also save time and money because it would not require each municipality to represent itself in the commonwealth’s Title III cases.

The motion cites case law that show municipalities not only may participate in committees, but under the right circumstances, should have their own.  

The treatment towns will receive–both during the restructuring process and under any resulting plan of adjustment–will be different than that of any other creditor or parties in interest. No other official committee either can or wants to represent the claims, needs and viewpoints for which 78 mayors are responsible, the towns argue.

Puerto Rico GO ad hoc group discloses debt held by members

San Juan – One of Puerto Rico’s main creditor groups, the Ad Hoc Group of General Obligation (GO) Bondholders, has disclosed the amount of commonwealth debt held by each of its seven current members, which are mostly hedge funds.

According to a document filed in court Thursday as part of the island’s bankruptcy under Title III of the federal Promesa law, as of July 12 the ad hoc group together held about $2.9 billion in Puerto Rico bonds, mostly in GOs. The payment of GO debt, which amounts to $13.2 billion, is backed by the commonwealth’s full faith and credit under its Constitution.

The group currently comprises Aurelius Capital Management, Autonomy Capital, FCO Advisors, Franklin Mutual Advisors, Monarch Alternative Capital, Senator Investment Group and Stone Lion.

The list is led by Autonomy, which owns $937.5 million in GO debt, followed by Monarch, with $585.1 million in GO bonds, of which $35.9 million is insured. The firm also has $21.5 million in Highways & Transportation Authority (HTA) bonds.

[Analysis] Puerto Rico government, its creditors begin mediation process

As for Aurelius, it owns about $470.9 million in GO bonds, with roughly $4.6 million insured. The hedge fund with offices in New York—and known for its role in Argentina’s debt crisis—also holds about $2.5 million in HTA debt. Moreover, Stone Lion owns $310 million in GOs, of which $2.8 million is insured, as well as $15 million in HTA bonds.

In the case of FCO Advisors, the firm holds almost $422 million in general obligations, with $2.9 million insured. It should be noted that FCO also owns approximately $10.15 million in junior Sales Tax Financing Corp. (Cofina) bonds. Certain creditors of the sales tax-backed debt are engaged in a legal dispute with GO bondholders, who claim that the pledged sales tax money belongs to the commonwealth, and thus must be available for the payment of GO debt.

Finally, Senator and Franklin Mutual Advisors have $254.7 million and $294 million in GO bonds, respectively.

Additional holders of General Obligation Bonds may become members of the Ad Hoc Group of General Obligation Bondholders, and certain members of the Ad Hoc Group of General Obligation Bondholders may cease to be members in the future,” warns the document filed by law firms Paul Weiss and Robbins Russell. Local law firm Jiménez, Graffam & Lausell also represents the ad hoc group.

The disclosure comes a day after the first mediation session between the government and its main creditor groups, as ordered by federal Judge Laura Taylor Swain.

Puerto Rico GOs denied intervention in Cofina dispute

SAN JUAN — Federal Judge Laura Taylor Swain denied Thursday intervention to a group of Puerto Rico’s general obligation (GO) creditors in the interpleader action filed by Bank of New York Mellon (BNYM)—trustee of the Sales Tax Financing Corp. (Cofina)—with respect to pledged sales tax funds that guarantee payment of Cofina bonds.

On May 16, BNYM filed action that seeks to have the court determine how the trustee should proceed with sales tax funds under its possession amid conflicting instructions over said monies.

Meanwhile, a group of GO bondholders sought to intervene in the action, arguing that pledged sales tax funds belong to the commonwealth and thus should be used to cover GO debt obligations pursuant to the island’s Constitution.

“The members of the GO group are not Cofina creditors, and have no direct claim to the Interpleaded Funds,” the court order reads, as Judge Swain found that the GO group lacked standing to assert its claims under BNYM’s action.

The court had already ordered BNYM to hold the funds in escrow until the interpleader was resolved.

“This is a setback not only for GOs, but also for the commonwealth and its legal strategy,” one source said, in reference to the government’s plan to tap into Cofina funds and redirect them to the island’s coffers.

The court recognizes that the intent of both the government and the board is to pool Cofina funds into available resources for an eventual debt-restructuring plan, and that the board seeks to solve the dispute with respect to Cofina.

“The claim that the commonwealth is entitled or required to apply the Cofina trust funds to payment of the commonwealth’s obligations to GO bondholders is one of which the commonwealth, as a debtor in a related Promesa Title III proceeding, has control. The commonwealth is not a party to the instant adversary proceeding,” the order adds.

The document also establishes that “the GO group’s asserted interest in the interpleaded funds would exist only if the commonwealth’s yet-unasserted claim on those funds were successful.”

In March, the Ricardo Rosselló administration and the GO bondholder group issued a joint statement in which they announced that the government—even if it was not taking a “definitive position” on the matter—would seek “prompt and expeditious resolution of the claims asserted by the GO bondholders regarding the constitutionality of Cofina,” under the Lex Claims case filed by GO creditors. In a nutshell, Lex Claims intends to have a court declare Cofina funds belong to the commonwealth.

On May 5, Puerto Rico’s financial control board filed for bankruptcy protection under Title III of Promesa on behalf of Cofina, as it did with the commonwealth. A mediation process has been set to address, among other issues, the commonwealth’s dispute with Cofina bondholders.

Discovery rules set

After holding a hearing in Boston on July 5, U.S. Magistrate Judge Judith Dein—who was appointed to assist Judge Swain with Puerto Rico’s Title III cases—set the rules for discovery on the commonwealth government over the Cofina dispute.

The commonwealth had opposed the Cofina creditors’ discovery petition, as it believed it was too broad and would not help solve the merits of the controversy.

By July 7, government officials and Cofina senior creditors will have to agree on search terms “aimed at identifying documents in the possession of [the government] that concern proposed changes to the use of the dedicated sales tax revenues,” Judge Dein’s order reads.

If disputes over the discovery process remain by July 12, parties will notify the court so it can promptly solve these issues.

As for the discovery time period, it will span from Feb. 15 to present. Documents to be produced include “public statements to third parties,” as well as electronically stored information in computers and cellphones.

If the commonwealth government refuses to produce documents citing such privileges as deliberative process and attorney-client, it must explain the court why it is withholding them.

Puerto Rico fiscal board warns certifications not subject to judicial challenges

SAN JUAN — Puerto Rico’s financial control board warned Thursday afternoon that the certifications it makes as part of its management of the commonwealth government’s finances are not subject to review by a federal court because the federal Promesa law says so.

That is why challenges by creditor groups over the validity of the island’s certified fiscal plan would be unsuccessful. According to the board, objections by creditors to the certified fiscal plan are aimed at having more money be directed toward debt service payments, than what the document establishes.

“The Oversight Board’s certifications are not even subject to being second-guessed by the Court,” reads the “status report” presented Thursday to federal Judge Laura Taylor Swain, a New York bankruptcy judge in charge of Puerto Rico’s restructuring cases under Title III of Promesa.

The fiscal board makes reference to Section 106 (e) of Promesa, which states that “there shall be no jurisdiction, in any United States district court, to review challenges to the Oversight Board’s certification determinations under this Act.”

The status report filed by the board —as requested by Judge Swain during the May 17 hearing—details the most recent interactions between the government and its creditors, including the disclosure of certain financial information from the commonwealth.

The document adds that although the board “wishes it could satisfy creditors’ desires for higher repayments,” it is “resolute” it will only certify plans that can create fiscal responsibility and achieve access to capital markets.

The board also talks against efforts by certain creditors to conduct discovery “as if the Court has jurisdiction over an action challenging the fiscal plan,” and points to actions filed by bond insurers Assured and Ambac that expressly challenge the certified fiscal plan.

“To be clear, creditors’ rights under the United States Constitution are protected. If a creditor believes its collateral is being taken for public use without just compensation, nothing prevents the creditor from requesting stay relief if it does not obtain adequate protection or just compensation,” the board says in the status report.

Under the certified fiscal plan, the government identified an average of $787 million in available cash to pay annual debt service over the next 10 years.

Access to the commonwealth’s financial data room 

The board also indicates in the document that since June 6, several creditor groups already have access to a “live” version of the commonwealth’s data room, which includes economic models in Excel that were used for the preparation of the fiscal plan and debt sustainability analysis. This information, however, is not available to the public.

The report also notes that, despite granting access to certain creditors, some continue to request more information mainly related to the deliberation process of the fiscal plan, government revenues and expenses, and analyses tied to debt-sustainability.

Although the board asserts it had answered many of these requests, it has refused to deliver certain documents, communications and analyses as they believe these are privileged and not subject to disclosure.

Supports appointment of mediation committee

On the other hand, the board supported Judge Swain in designating a group that comprises five federal judges who will act as mediators as part of the commonwealth’s Title III bankruptcy cases.

“The team can only enhance the prospects of success for Puerto Rico,” reads the board’s status report.

Yet, it also mentioned that if Judge Swain approves the appointment of two agents that would represent the commonwealth and Sales Tax Financing Corp. (Cofina by its Spanish acronym) as the board proposed in a June 10 motion of June 10, they will be able to negotiate some type of settlement aided by the mediation committee.