Friday, March 31, 2023

Title III Creditors Come Out Better Under Promesa

By on December 2, 2021

FOMB Report: Average Claim Recovery Is 69 Percent

Editor’s note: This report was first published in the Dec. 2, 2021, issue of Caribbean Business. Subscribe here to read about the most important developments of the week.

Claimholders against the government of Puerto Rico would receive greater average recoveries under the amended plan of adjustment (POA) proposed by Puerto Rico’s Financial Oversight and Management Board (FOMB) than if the Title III stay on commonwealth debt payments were lifted and claims were enforced, according to a report filed by the fiscal panel. 

Such claimholders would receive an average recovery of 69 percent in the amended POA, which the oversight board stressed in the report “compares favorably” to the projected range of recoveries pursuant to the board’s “best interest test analysis if the commonwealth’s Title III case is dismissed”—between 34 percent and 62 percent, according to the “Notice of Filing of Proposed Finding of Facts and Conclusions of Law in Connection with Confirmation of the Modified Eighth Amended Title III Plan of Adjustment of the Commonwealth of Puerto Rico,” filed before U.S. District Judge Laura Taylor Swain as part of the POA confirmation proceedings. 

Of the estimated $22.8 billion in claims asserted against the commonwealth, excluding the payment of restriction fees or consummation costs and federal claims, claimholders are projected to receive $15.7 billion under the amended POA, for an aggregate recovery for all claimholders of 69 percent versus the estimated recovery range of between $9.3 billion and $15.3 billion outside the debt restructuring process established by the federal 2016 Puerto Rico Oversight, Management and Economic Stability Act (Promesa). 

The document stresses that “realized Commonwealth creditor recoveries could be even higher pursuant to the Plan,” given that the 69 percent estimated recovery excludes any additional recoveries available on account of payments from the Avoidance Action Trust or contingent value instruments (CVIs). 

“An analysis of creditor recoveries in such hypothetical circumstances requires application of a number of assumptions, including (i) estimates of the resources that would be available for debt service, which requires an assessment of available cash, revenues, and operating expenses in the absence of a confirmed plan of adjustment; (ii) the outstanding creditor obligations due and payable that would exist outside of Title III; and (iii) the priority in which creditor claims would be paid outside of Title III, which in certain circumstances requires consideration of assumptions regarding the potential outcome of litigation matters,” states the 113-page report, ordered by Judge Swain after eight days of POA confirmation hearings in San Juan last month. 

“The recoveries for claimholders of each Debtor pursuant to the Plan, in the aggregate, are within the range or greater than the range of the projected recoveries for such claimholders in the aggregate if the Title III Cases were dismissed for each of the Debtors, as demonstrated by the best interest test reports attached to the Shah Declaration…,” the FOMB report reads. “Additionally, the recovery pursuant to the Plan for holders of GO [general obligation] Bonds is within the range of the projected recoveries for such claimholders pursuant to the Oversight Board’s best interest test analysis if the Commonwealth’s Title III case was dismissed, assuming all GO Bonds were validly issued.” 

Other Recoveries

Moreover, the report states that commonwealth Employee Retirement System (ERS) bondholders are projected to recover about $444 million on $3.17 billion of claims, and ERS general unsecured claims are projected to receive 100 percent on approximately $300,000 of claims, for an implied aggregate recovery of 14 percent.  

“This is within the range of projected recoveries pursuant to the Oversight Board’s best interest test analysis if ERS’s Title III case is dismissed,” according to the report. It adds that the payments are “exclusive of the payment of the ERS Restriction Fee,” which “is not being paid on account of claims.” 

Public Buildings Administration (PBA) bondholders are projected to receive a recovery of $1.1 billion against the commonwealth agency. The Plan provides that the PBA/Debt Recovery Authority (DRA) Secured Claim, PBA General Unsecured Claims, and PBA/DRA Unsecured Claims will receive approximately $6.6 million, $41 million and $13.4 million, respectively. Holders of claims against the PBA are projected to receive “an implied aggregate recovery” of $1.1 billion, or 21 percent, according to the FOMB report, which adds that “this compares favorably to the projected recoveries pursuant to the Oversight Board’s best interest test analysis if PBA’s Title III case is dismissed,” namely $300,000, or 5 percent. 

The board’s report also stresses that the retiree claims were justified as claims for “essential public services” under Article II, section 18 of the Puerto Rico Constitution, which the FOMB argues “constitutes a reasonable justification for treating them differently from other claims, adding that “pensions are deferred compensation for the essential services that retirees, who served as police officers, firemen, teachers, judges, and government employees of all categories, provided to
the Commonwealth.” 

In addition, the plan provides a so-called upside participation bonus pursuant to the American Federation of State, County and Municipal Employees (AFSCME) Plan Support Agreement, which will come out to a minimum of $2,000 for each AFSCME-represented employee during the five-year term of the union’s new collective bargaining agreement. The additional cost of this modification is approximately $18.35 million a year for the five years beginning in fiscal year 2022.  

The report stresses that as of the effective date of the POA, and to the extent not previously preempted pursuant to an order of the Title III court, all commonwealth laws inconsistent with Promesa, other than budgets certified by the oversight board, will be preempted, adding that these include laws include those enacted before June 30, 2016. 

The report points out that retirement window laws—Act 80-2020, Act 81-2020 and Act 82-2020—were added to the list of preempted laws, adding that “certain preempted statutes… would require more than $3 billion in Commonwealth revenues to be transferred in fiscal year 2022, including another $984 million for current retirement benefits for commonwealth, teachers and judicial branch workers.” 

“Many of the preempted statutes generally would require the Commonwealth to use its revenues to repay its general obligation and guaranteed debt in full, and the amount of debt service necessary for fiscal year 2022 would be $1.7 billion,” the report states. “These statutes are inconsistent with PROMESA, and would undermine the restructuring contemplated by the Plan and Puerto Rico’s return to fiscal responsibility and access to capital markets.”  

It is astonishing to hear an announcement by the OBoard that it would further tweak the POA to include several bennies such as Act 80 for incentivized public employee retirement; Act 81 for a dignified retirement and Act 82 for the liquidation of accrued leave days. And the cherry on top is the prohibiting of the 10-year restitution of the defined benefit pension system. Even Marty Bienenstock, he of the Ley de Quiebra Criolla, admitted that implementing acts 80 and 82 is not a risk worth taking because it affects the POA’s feasibility. Perhaps Bienenstock spoke the truth when he said that local laws are incompatible with Promesa. There is pain coming; that market access will not keep at bay.

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