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Puerto Rico's Bondholders Struggle For A Seat At The Bankruptcy Negotiation Table
Aug 22, 2017 | SeekingAlpha

On May 3, 2017, after years of speculation and legal and political challenges, the Commonwealth of Puerto Rico, by and through its seven-member Financial Oversight and Management Board, filed for bankruptcy protection under the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”). By order of the Chief Justice of the Supreme Court of the United States, Judge Laura Taylor Swain of the Southern District of New York has been designated presiding judge in this and certain related Puerto Rican bankruptcy cases.
Puerto Rico’s July revenues were 8% above budget
Aug 21, 2017 | Bond Buyer
By Robert Slavin

Puerto Rico’s July revenues came in 8% above budget as non-residents contributed more than expected. Net revenues totaled $649.4 million or $48.3 million above the projection, according to the Puerto Rico Treasury Department. Net revenues were 2.4% below the July 2016 total, the department reported in a written statement on Monday.
Puerto Rico Sales Tax Bond Row On Track For Dec. Resolution
Aug 9, 2017 | Law 360
By Alex Wolf

The federal judge overseeing Puerto Rico’s landmark insolvency proceedings nudged forward a consensual plan to settle a key creditor dispute over liens on the territory’s sales tax revenues before the end of the year, approving the appointment of agents to represent competing bondholders at a hearing Wednesday.
Puerto Rico's biggest creditors envision resolving key dispute this year
Aug 9, 2017 | Reuters
By Nick Brown

U.S. District Judge Laura Taylor Swain, presiding over Puerto Rico's massive bankruptcy, approved an agreement between the island's competing creditor classes on Wednesday aimed at moving forward with an effort to resolve claims on sales tax revenue.
Puerto Rico financial board creating grounds for own removal
Aug 8, 2017 | The Hill
By Ojel Rodriguez

Scanning recent tax revenues, one would think that all is well in Puerto Rico. On Aug. 2, the Puerto Rican Treasury Department announced that tax collection for the first month of fiscal year 2018 was ahead of its forecast. In addition, there was the publication of data showing the government collected more than $150 million above the forecasted revenue figures in fiscal year 2017.
Hedge Fund Sues to Have Puerto Rico’s Bankruptcy Case Thrown Out
Aug 7, 2017 | New York Times
By Mary Williams Walsh

A hedge fund sued on Monday to have Puerto Rico’s bankruptcy case thrown out, arguing that the federal oversight board guiding the island’s financial affairs was unconstitutionally established.
Setting Priorities Straight: Time to Audit Puerto Rico’s Debt
Aug 5, 2017 | Huffington Post
By Jeanette Bonifaz

Arriving in Puerto Rico, sounds of the famous “Nuyorican” salsa musician Willie Colon’s music blasted through the airport speakers in stores and restaurants. The first impression of jubilance and glow in the atmosphere, however, contradicted the dire situation that 3.5 million Puerto Ricans currently find themselves in.
Puerto Rico governor defies oversight board on worker furloughs
Aug 4, 2017 | The Hill
By Rafael Bernal

Puerto Rico Gov. Ricardo Rosselló (D) on Friday said he would not implement a government worker furlough mandated by the federally appointed Fiscal Oversight Board.
Puerto Rico oversight board orders furloughs, governor defiant
Aug 4, 2017 | Reuters
By Daniel Bases

Puerto Rico's federally appointed financial oversight board said on Friday it will institute a two-day per month work furlough for government employees, but a defiant Governor Ricardo Rossello rejected the measure out of hand.
Bondholders Disclose $3 Billion of Puerto Rico Electricity Debt
Aug 2, 2017 | Bloomberg
By Michelle Kaske

An ad hoc group of bondholders that manage $3 billion of Puerto Rico Electric Power Authority debt revealed in court documents how much of the utility’s bonds that each firm holds.
Is Congress’ plan to save Puerto Rico working?
Jul 31, 2017 | Associated Press
By Edwin Melendez

A year ago, Congress cobbled together a plan to try to save Puerto Rico from its US$123 billion debt and pension crisis without costing American taxpayers a penny.
In Puerto Rico bankruptcy, mutual funds compete with themselves
Jul 28, 2017 | Reuters
By Nick Brown

U.S. mutual funds that held onto Puerto Rican debt as its economy crept toward collapse could get drawn into battles that pit their own investors against each other, as the island navigates the biggest government bankruptcy in U.S. history.
Top adviser to Puerto Rico governor resigns, 'in no way pressured'
Jul 20, 2017 | Reuters
By Nick Brown

Elias Sanchez, Governor Ricardo Rosselló’s liaison to Puerto Rico’s financial oversight board who has been criticized over his financial disclosures, resigned on Thursday.
Puerto Rico board approves liquidation of Government Development Bank
Jul 17, 2017 | Nick Brown
By Nick Brown

Puerto Rico's financial oversight board late on Friday approved a plan to wind down the island's Government Development Bank (GDB), bringing the defunct fiscal agent a step closer to settling more than $5 billion in debt.
Puerto Rico Oversight Board approves GDB debt restructuring
Jul 17, 2017 | Bond Buyer
By Robert Slavin

The Puerto Rico Oversight Board approved a negotiated plan for restructuring the Government Development Bank for Puerto Rico’s $4.8 billion in debt.
Puerto Rico debt mediation gets started
Jul 12, 2017 | Bond Buyer
By Robert Slavin

A mediation process in a restructuring of $47.5 billion of Puerto Rico debt got underway Wednesday in a federal court in downtown Manhattan.
Puerto Rico’s Broken Promesa
Jul 9, 2017 | Wall Street Journal
By Mary Anastasia O'Grady

Puerto Rico’s government-owned electricity monopoly—known by the acronym Prepa—filed for bankruptcy protection July 2. It did so even though it had negotiated a restructuring agreement with creditors that would have saved $2.2 billion in debt service that could have been used to invest in modernizing the utility.
Puerto Rico mediator sets meeting with stakeholders
Jun 28, 2017 | Reuters
By Nick Brown

The chief mediator in Puerto Rico’s massive bankruptcy set an initial meeting with the U.S. territory and its creditors for July 12, saying it would be introductory, rather than substantive.
Puerto Rico judge nixes negotiation plan in debt battle
Jun 28, 2017 | Reuters
By Nick Brown

The judge in Puerto Rico's landmark bankruptcy on Wednesday shot down a proposal to appoint fiduciary agents to represent warring creditors in debt restructuring talks.
5 Federal Judges To Mediate Puerto Rico Bankruptcy Fights
Jun 14, 2017 | Law 360
By Alex Wolf

A team of five sitting federal judges across several jurisdictions was appointed on Wednesday to help mediate issues arising from Puerto Rico's massive debt restructuring proceedings, with U.S. Bankruptcy Judge Barbara Houser of Texas' Northern District to serve as leader of the group.
Judge Swain appoints mediation team for Puerto Rico’s bankruptcy cases
Jun 14, 2017 | Caribbean Business
By Luis Valentin Ortiz

Federal bankruptcy Judge Laura Taylor Swain ordered Wednesday the designation of five federal judges who will act as mediators in Puerto Rico’s Title III bankruptcy cases.
Stockton bankruptcy judge among five tapped to mediate Puerto Rico debt fights
Jun 14, 2017 | Reuters
By Nick Brown

The five-judge team tapped to mediate a slew of thorny legal fights in Puerto Rico's massive bankruptcy will include the judge who presided over Stockton, California's 2012 bankruptcy and Puerto Rican-born federal Judge Victor Marrero.
Puerto Rico creditors open to mediation in bankruptcy court
May 17, 2017 | Reuters
By Nick Brown

Puerto Rico's main creditors, meeting before a U.S. bankruptcy judge in the largest public finance restructuring case in history, are interested in continuing mediation settlement talks to resolve the island's unpayable $70 billion debt bill.

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Puerto Rico's Bondholders Struggle For A Seat At The Bankruptcy Negotiation Table

Aug 22, 2017 | SeekingAlpha

Summary
An ad hoc group of general obligation bondholders asked the court in a July 21st motion to reconstitute the official unsecured creditors’ committee.
The group had previously resisted formation of an official committee, but also argued that, should one be formed, it should be comprised mostly or even entirely of bondholders.
In an August 11th memorandum decision, the court refused to reconstitute the official committee. The dispute highlights the strategic nature of bankruptcy as well as the important role of committees.I. Introduction
On May 3, 2017, after years of speculation and legal and political challenges, the Commonwealth of Puerto Rico, by and through its seven-member Financial Oversight and Management Board, filed for bankruptcy protection under the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”). By order of the Chief Justice of the Supreme Court of the United States, Judge Laura Taylor Swain of the Southern District of New York has been designated presiding judge in this and certain related Puerto Rican bankruptcy cases.
As we would expect in any case involving application of a brand new legal framework to a body that was previously ineligible for bankruptcy protection, the Puerto Rico restructuring has featured a number of thorny questions. At first blush, many seem to be questions of legal interpretation. But most will never be answered through pure statutory and doctrinal analysis.
This is because bankruptcy, like most litigation, is a game of strategy played against a backdrop of scarcity. Laws governing payment priority are extremely important in setting the stage, but not all claims are fully litigated and at some point any last-standing holdouts will be pressured to accept a deal that has reached almost full consensus. When these deals are struck, whatever the debtor agrees to pay to one group of creditors will impact what other creditors receive. All of this means it is incredibly important for parties to secure an early, prominent, and, ideally, well-funded seat at the bankruptcy negotiation table.
This article examines a recent disagreement involving whether and to what extent certain bondholders will have such a seat at Puerto Rico’s bankruptcy negotiation table.II. The U.S. Trustee's Formation of an Unsecured Creditors' Committee
The dispute began on May 19th, when the U.S. Trustee announced that it would appoint an official retiree committee and an official unsecured creditors’ committee in the Commonwealth’s bankruptcy case. The U.S. Trustee derived its appointment power from PROMESA’s integration of Chapter 11 of the U.S. Bankruptcy Code. Similar to Chapter 9, which governs municipal bankruptcies, PROMESA makes applicable certain provisions of Chapter 11. Both Chapter 9 and PROMESA borrow heavily from Chapter 11 because that is the portion of the Bankruptcy Code that was explicitly drafted with the most complex restructurings in mind. As a result, many of its provisions are suitable not only for business debtors, but for any debtors with large groups of creditors battling for better treatment under a plan of restructuring.
One of Chapter 11’s provisions that PROMESA makes applicable to the Commonwealth is Section 1102, which authorizes one or more committees to represent groups of stakeholders. In Chapter 11 business bankruptcies, the U.S. Trustee typically appoints an unsecured creditors’ committee and, if circumstances warrant, an official equity committee. Secured creditors generally advocate directly in their own right, or they form ad hoc groups to negotiate as a collective body. In Chapter 9 municipal bankruptcies, the U.S. Trustee typically appoints only a retirees’ committee, and may decline to appoint an unsecured creditors’ committee on the grounds that such a committee is unnecessary (usually because the largest unsecured creditors are already represented on the retirees’ committee or advocating directly in their own right, or because the municipality has indicated its intent to pay them in full).
But while there are many similarities between PROMESA and Chapter 9, there is at least one important distinction: PROMESA provides, in Section 2176(a), that the court may award legal and other professional fees incurred by official committees, while Chapter 9 contains no such provision. This has an obvious incentive effect. Creditors that might otherwise prefer to advocate directly in their own right may, under PROMESA, prefer to have an official committee so that the bills are paid by the debtor.
An official committee also offers other benefits, such as investigatory powers and a clear and recognized seat at the bankruptcy negotiation table. This is because the debtor, the other parties, and the court may pay particular attention to arguments made by an official committee, and the debtor may be more inclined to negotiate and reach settlements with an official committee. Those settlements, in turn, can be the basis for pressuring holdouts to accept the plan or risk a judicial cramdown.
Of course, the attractiveness of an official committee to any given creditor ultimately comes down to how good the creditor feels about its payment priority, and, if it isn’t entirely confident of its legal rights, whether that creditor feels like the committee will represent its interests when it presses for better treatment. Otherwise, an official committee - at least in that particular creditor’s eyes - can do more harm than good by using its powers and its seat at the negotiation table to extract value that might otherwise flow to the creditor that believes it occupies a superior position. This is where things become especially murky in Puerto Rico.III. The Ad Hoc Committee of General Obligation Bondholders
A group of creditors holding approximately $3 billion of full faith and credit general obligation bonds issued or guaranteed by the Commonwealth has come together, calling itself the Ad Hoc Group of General Obligation Bondholders (the “GO Group”). The GO Group believes that its members - and other holders of the Commonwealth’s approximately $19.6 billion in general obligation claims - are actually secured creditors, meaning that they would be among the first in line for repayment. But the Commonwealth’s Financial Oversight Board argues that the general obligation bondholders are unsecured, meaning that they are on equal footing with most of Puerto Rico’s other creditors.
This deeper rift, which has to do with the way bankruptcy and non-bankruptcy laws perceive promises to use all of a government’s available resources to pay certain creditors, is likely to be the subject of extensive litigation that could take months or even years to resolve.
In the meantime, there is the more immediate matter of official committee formation. But nothing is simple in bankruptcy, and even this seemingly administrative committee-appointment matter reflects the same broader strategic considerations. If the general obligation bondholders are secured, then their interests would not be represented by an unsecured creditors’ committee. If, on the other hand, they are unsecured, then they would be among the Commonwealth’s largest unsecured creditors and one or more of them should be appointed to serve on any such committee.
The GO Group thus found itself between the proverbial rock and a hard place. Should it resist the formation of an unsecured creditors’ committee as an unnecessary drain on the Commonwealth’s resources and proceed as an ad hoc group the way that most prominent clusters of senior secured creditors proceed in Chapter 11 cases? Or should it demand to be part of the official committee?
Again, the problem is that the GO Group presently faces a high degree of legal uncertainty regarding the secured nature of its claims. And, while an ad hoc group of clearly senior secured creditors has an undeniably important seat at the negotiation table even without an official committee, an ad hoc group with questionable or unrecognizable liens may fare the poorest of them all. This is because, to the extent it is relegated to unsecured status, its members would have no assurance that their unique interests are represented by the official committee.IV. The Ad Hoc Committee's Challenges Regarding the Official Committee
Likely motivated by these and other concerns, the GO Group contacted the U.S. Trustee in June to challenge its decision to appoint an official unsecured creditors’ committee. (This and other correspondence can be found in exhibits to this motion.) The GO Group argued that such a committee should not be formed at all; however, so long as a committee was formed, then “it should be primarily, if not entirely, composed of” members of the GO Group.
But the U.S. Trustee proceeded to form an official unsecured creditors' committee and did not include any general obligation bondholders. In July, the GO Group again contacted the U.S. Trustee, requesting that the official committee be reconstituted to include general obligation bondholders. When the U.S. Trustee declined this request in mid-July, the GO Group filed a July 21st motion asking the court to reconstitute the official committee.
In an unavoidably circular argument, the GO Group maintained that its members are secured, but reasoned that general obligation bondholders should nonetheless serve on the unsecured creditors’ committee because any such committee should be fully representative of the Commonwealth’s diverse creditor body.
In an August 11th memorandum opinion, Judge Swain dealt a strategic blow to the GO Group, denying the motion on the grounds that creditors holding only secured claims are not entitled to serve on an official unsecured creditors’ committee, and that the GO Group has failed to demonstrate that its interests are not “adequately represented” in the case. Highlighting the inherently circular nature of the GO Group’s argument, she explained, “the GO Group itself has never conceded that it is unsecured. To the contrary, it argues that the Constitutional Debt is protected by a statutory lien….The GO Group cannot have it both ways. Its legal stance is fundamentally at odds with that of the general unsecured creditors, rendering it entirely unsuitable as a representative of those creditors’ interests.”V. Conclusion
For now, it looks like general obligation bondholders will have to rely on the GO Group or on their own individual efforts to advocate for their interests. Assuming broader legal challenges to the Commonwealth’s bankruptcy case are unsuccessful, the GO Group’s most important task will be to build a convincing argument that the bondholders' claims are considered secured under federal bankruptcy law.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Puerto Rico’s July revenues were 8% above budget

Aug 21, 2017 | Bond Buyer

By Robert Slavin

Puerto Rico’s July revenues came in 8% above budget as non-residents contributed more than expected.
Net revenues totaled $649.4 million or $48.3 million above the projection, according to the Puerto Rico Treasury Department. Net revenues were 2.4% below the July 2016 total, the department reported in a written statement on Monday.
Puerto Rico’s July revenues came in 8% above budget as non-residents contributed more than expected.
Net revenues totaled $649.4 million or $48.3 million above the projection, according to the Puerto Rico Treasury Department. Net revenues were 2.4% below the July 2016 total, the department reported in a written statement on Monday.

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Puerto Rico Sales Tax Bond Row On Track For Dec. Resolution

Aug 9, 2017 | Law 360

By Alex Wolf

The federal judge overseeing Puerto Rico’s landmark insolvency proceedings nudged forward a consensual plan to settle a key creditor dispute over liens on the territory’s sales tax revenues before the end of the year, approving the appointment of agents to represent competing bondholders at a hearing Wednesday.

The dispute over whether pledged revenues collected by the Puerto Rico Sales Tax Financing Corp., known as COFINA, can be used to satisfy the commonwealth’s general debt obligations is slated to be resolved by Dec. 15 under a method recently agreed to by opposing groups of creditors.

Under the motion approved by U.S. District Judge Laura Taylor Swain, the unsecured creditors committee will represent the commonwealth, while COFINA’s creditors will appoint their own agent to fight over whether the revenues pledged to secure more than $17 billion worth of COFINA bonds can be deemed property of the commonwealth and used to satisfy budgetary needs and general debt obligations that amount to roughly $18 billion.

The decision came at the beginning of an omnibus hearing in San Juan that tackled simmering disputes that have populated the docket of Puerto Rico’s bankruptcy-like cases since the territory and its public corporations began court-monitored restructuring under the 2016 Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA, in May. The legislation, enacted by Congress to right-size the island’s finances, controls how Puerto Rico must address a $74 billion public debt load and $49 billion in pension liabilities.

Among other issues settled Wednesday, Judge Swain turned down a request to reconstitute a committee established to represent retirees looking to maximize pension benefit recoveries and also rejected an attempt to create an official committee to represent Puerto Rico’s 78 municipalities, finding that their interests are adequately represented by the standing committees.

With respect to the municipalities that moved for their own debtor-funded committee, Judge Swain observed that committees are only reserved for people, and the towns have not established that they are creditors.

The judge temporarily passed on deciding another fight over whether the territory’s general obligation bondholders can disturb the current makeup of the unsecured creditors committee and add some of their own members. Although the Wall Street investors and bond insurers have a prioritized lien, they argue that because the commonwealth and the federally appointed board overseeing the restructuring cases view them as unsecured creditors, they should have a right to be represented on the committee.

“We’re the only creditors right now that the commonwealth is not promising to pay in full,” said group attorney Andrew Rosenberg of Paul Weiss Rifkind Wharton & Garrison LLP.

Pushback against Aurelius Capital Management LP, Stone Lion LP and others was strong. Committee attorney Luc Despins of Paul Hastings LLP said it would be improper to include members that are asserting priority over others and have recently filed a motion to have the PROMESA cases declared unconstitutional.

“To grant this motion while they’re actively seeking to dismiss these cases would be a travesty,” he said.

The U.S. Trustee’s office also weighed in, saying that as long as the bondholders assert that they are fully secured, they are not entitled to representation by the committee.

Judge Swain also reserved judgment on whether or not she would lift the automatic litigation stay enacted when the Puerto Rico Electric Power Authority initiated its own restructuring case last month with $8.3 billion in debt. PREPA’s lenders, who filed suit this week to force the utility to remit pledged funds for debt service, are seeking to have the company put into receivership to pursue revenue enhancements and preserve their secured collateral revenues.

The territory’s sole electricity utility had appeared to distinguish itself from Puerto Rico’s other public debtors by negotiating a debt rework with its creditors out of court, but that deal fell apart when the island’s financial oversight board nixed the rework in June.

Board attorney Martin Bienenstock told Judge Swain on Wednesday that a lift of stay would be inappropriate since she has jurisdiction to rule on the appointment of a receiver. He then argued that a receiver would be inappropriate since the bondholders have not shown that their collateral is diminishing. Rather, the bondholders are angling for a receiver in order to increase electricity rates and generate more money, he added.

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Puerto Rico's biggest creditors envision resolving key dispute this year

Aug 9, 2017 | Reuters

By Nick Brown

U.S. District Judge Laura Taylor Swain, presiding over Puerto Rico's massive bankruptcy, approved an agreement between the island's competing creditor classes on Wednesday aimed at moving forward with an effort to resolve claims on sales tax revenue.
The deal between the two biggest creditor classes, General Obligation (GO) bondholders and COFINA bondholders, includes the appointment of an agent for each side who are charged with pursuing the best resolution for their debtor’s estate as a whole, as opposed to advocating for particular creditors of that debtor.
COFINA’s bonds are backed by the island’s sales tax revenue, while GO debt carries a constitutional guarantee giving it a claim on all Puerto Rico’s revenues.
The deal, approved by Swain at a hearing taking place in San Juan, gives the two sides until Dec. 15 to either settle the dispute or have Swain issue a ruling.
The groups, which together hold about half the U.S. territory’s $72 billion in debt, are fighting over which side has the primary claim on sales tax money. Settling that fight is crucial to clarifying Puerto Rico’s convoluted debt structure and resolving its bankruptcy, which it filed in May under the federal Puerto Rico rescue law known as PROMESA.
In addition to its debt, held by millions of American investors, Puerto Rico is shouldering insolvent public pensions, a collapsing healthcare system, and poverty and unemployment rates that dwarf U.S. averages. All of this contributes to a population exodus and shrinking tax base, which in turn makes the debt load even harder for the island to bear.
U.S. Federal Judge Barbara Houser, who leads a mediation team in the bankruptcy, appeared at Wednesday’s hearing to say her team was “developing its game plan on how we are going to tackle these issues,” and that she expects formal mediation talks to begin “within the month” on some issues.
Swain was expected to also rule on a motion by creditors to appoint a receiver for Puerto Rico’s debt-laden power authority, PREPA.
Much of the morning discussion centered on fees for lawyers and other professionals, which some experts believe could top $1 billion. A handful of firms whose fees are being paid by Puerto Rico’s estate have agreed to take discounts of between 15 and 20 percent, proposals Swain generally approved.

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Puerto Rico financial board creating grounds for own removal

Aug 8, 2017 | The Hill

By Ojel Rodriguez

Scanning recent tax revenues, one would think that all is well in Puerto Rico. On Aug. 2, the Puerto Rican Treasury Department announced that tax collection for the first month of fiscal year 2018 was ahead of its forecast. In addition, there was the publication of data showing the government collected more than $150 million above the forecasted revenue figures in fiscal year 2017.
Yet, on Friday, the federally-appointed financial oversight board announced the implementation of a two-day government furloughprogram beginning this September, along with a 10-percent cut to public pension benefits beginning in fiscal year 2020.
This proposed program came in response to the liquidity problems facing the government, but Puerto Rico Governor Ricky Rossello disputes the board assertion noting that, “There is about $1.4 billion to $1.7 billion. Cash flow is there and is a result of the measures we have taken so far.”

This issue is very worrying because the Puerto Rican government informed Judge Laura Taylor Swain, who is overseeing the island's bankruptcy proceedings, that by the end of June, cash flow would be $290 million. Now, Rossello’s administration said the government ended with almost $1.8 billion in cash on June 30.
According to new information arising from the ninth meeting of the fiscal board last Friday, oversight of the finances of the commonwealth are clearly lacking. The budget was certified weeks ago, and the government did not meet the plan. Furthermore, in March, the liquidity report concluded cash flow was at $230 million.
All of this news comes on top of the lack of financial transparency that has governed the actions of the Puerto Rican government and the financial oversight board. One thing is clear: The actions taken by the board and Gov. Rossello’s administration are ripping off bondholders.
For the last few months, the unelected seven-member fiscal board set up under the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) has been pursuing a policy to lead Puerto Rico back to the markets. However, this policy is being pursued in the belief that the island can quickly regain access via fiscal consolidation, and given the lack of definition of what is an essential service, this consolidation is amounting to basically reducing debt service payments.
The current situation has seen the board and government follow the policy of taking almost every government entity through Title III bankruptcy instead of following the route of fair, transparent and open negotiations with creditors, many of whom are Puerto Ricans. Consequently, this path results in a cut to bondholder payments totaling almost 80 percent of the expected payments for the next 10 fiscal years.
Instead of following a strong fiscal policy that includes a real fiscal consolidation and the subsequent return to sound finances, Puerto Rico has chosen to violate creditors' rights and fail to pay the money creditors are owed.
The fiscal board established by Congress has chosen to disregard the words and intent of the PROMESA legislation, refusing to amend the fiscal plan for more debt service payments in spite of the better-than-expected revenue figures. It has misrepresented the liquidity figures in court by arguing that the government will be out of cash by Nov. 1.
Now, it turns out, given the refusal to pay bondholders, the government is sitting with millions in cash, which wasn't accounted for in the evidence presented to Judge Swain.
After all of the time the fiscal board has spent litigating against creditors, the most recent meeting of the board reveals its failure to establish the real fiscal condition of the commonwealth. The decisions and disregard of the fiscal board are laying the groundwork for a clear vote of no confidence.

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Hedge Fund Sues to Have Puerto Rico’s Bankruptcy Case Thrown Out

Aug 7, 2017 | New York Times

By Mary Williams Walsh

A hedge fund sued on Monday to have Puerto Rico’s bankruptcy casethrown out, arguing that the federal oversight board guiding the island’s financial affairs was unconstitutionally established.
In a lawsuit filed in United States District Court in San Juan, the hedge fund, Aurelius Capital, cited the “appointments clause” of the United States Constitution, which calls for all principal officers of the federal government to be appointed by the president, and then confirmed by the Senate.
That did not happen when the seven members of the Financial Oversight and Management Board for Puerto Rico were selected, Aurelius said in its motion to dismiss the bankruptcy-like proceedings. The board members were instead “handpicked by individual members of Congress,” it said, through “an intricate system of Balkanized lists, designed to severely constrain the president’s appointment powers.”
No Senate confirmation proceedings occurred, although senators of both parties were among the members of Congress who made recommendations last year to President Barack Obama for the board.
Aurelius Capital was among the firms that fought Argentina in court for years over its sovereign debt default, and ultimately succeeded in pressuring the government there to pay.
A spokesman for the oversight board said the members were reviewing the lawsuit and could not comment.
The oversight board was established last year, when Puerto Rico was sinking under $123 billion of public debt and pension obligations that it amassed by years of borrowing to plug deficits. The federal bankruptcy code bans Puerto Rico from declaring bankruptcy, and by 2016, it was defaulting haphazardly on payment after payment, without any way to take shelter from the many resulting creditor lawsuits.
After a number of hearings, and even expedited arguments before the United States Supreme Court, Congress last year enacted a law called Promesa, which gives insolvent territories a way to seek court protection from their creditors. Title III of Promesa, which is similar to Chapter 9 municipal bankruptcy, gives Puerto Rico the power to abrogate contracts unilaterally — but it has no access to Title III without the oversight board’s authorization.
The law went into effect last summer, and in the months that followed, the board members were chosen. Work then began on a five-year fiscal reform plan, and Puerto Rico’s Title III proceedings began last May. They were expected to be slow and contentious even before Aurelius Capital challenged the oversight board. That is because Puerto Rico’s debt is extremely complex, the hierarchy of creditors is unclear, and the situation has no legal precedent to draw on. Large losses for bondholders are expected.
Aurelius sued just days after the governor of Puerto Rico, Ricardo Rosselló, defied the oversight board for his own reasons. He said on Friday that the board’s five-year fiscal reform plan was excessively harsh and that he would not shut down much of the government two days every month for the rest of the fiscal year, something the board saw as necessary to save money and streamline operations.
Aurelius Capital sued in its capacity as a holder of Puerto Rico’s general obligation bonds. When those bonds were issued, over many years, Puerto Rico’s Constitution in effect guaranteed them, saying that if money ever became tight on the island, the bondholders would have first call on the “available resources” of the territory’s government.
Some of Puerto Rico’s bondholders argue that they bought the bonds on the understanding that their repayments and interest were by law the government’s first priority. They were surprised when they found that Puerto Rico’s five-year plan called for deep cuts in all bond payments, including payments to the holders of general-obligation bonds. The oversight board wants to use the savings to finance government operations for the five-year recovery period. But creditors say this approach is at odds with the Puerto Rican Constitution.
To make matters worse, Mr. Rosselló said on Friday that he was not willing to honor yet another provision of the fiscal plan: pension cuts averaging 10 percent for certain retired public workers. The five-year plan calls for the cuts to be phased in over the next three years, with the biggest pensions being cut the most.
Puerto Rico’s pension funds have almost exhausted their assets, and all retirees are being shifted to a pay-as-you-go system, in which the central government will pay pensions directly from its budget. That means some of its “available resources,” will be used for pensions instead of debt service.
On Monday, Aurelius also asked the federal court in San Juan to lift the “stay” of Promesa, which keeps Puerto Rico’s creditors from suing the government. Aurelius said it wanted to seek declaratory and injunctive relief to keep the oversight board from operating until it could be reconstituted in compliance with the appointments clause.
“Whether or not one agrees with the policy positions of the board, foundational legal principles require that it be constituted in compliance with the Constitution,” Aurelius’s lead lawyer, Theodore B. Olson of Gibson, Dunn & Crutcher, said in a statement.

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Setting Priorities Straight: Time to Audit Puerto Rico’s Debt

Aug 5, 2017 | Huffington Post

By Jeanette Bonifaz

Arriving in Puerto Rico, sounds of the famous “Nuyorican” salsa musician Willie Colon’s music blasted through the airport speakers in stores and restaurants. The first impression of jubilance and glow in the atmosphere, however, contradicted the dire situation that 3.5 million Puerto Ricans currently find themselves in.
The Caribbean island owes $74 billion to bondholders and $50 billion to pension systems, has 45.5 percent of its population living in poverty, and retains an unfair political status that fuels grievances. Additionally, in complete defiance to the values of democracy and accountability, an unelected Fiscal Control Board appointed by the United States Congress under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) now has de facto authority over Puerto Rico’s finances.
Instead of focusing energy and resources on finding a realistic way out of the crisis, the current administration led by Governor Ricardo Rosselló and his New Progressive Party decided to push for a plebiscite to vote on the status of the island and campaigned tirelessly to promote statehood. After five previous plebiscites proving that obtaining statehood was extremely unlikely, the non-binding plebiscite held on June 11, 2017, served only to give illusory hopes to those holding on to the belief that Puerto Rico’s ills could be remedied by becoming the 51st state. Even if achieved, however, statehood would not act as a magic wand to remedy the island’s problems. A more astute course of action would be to focus on pushing for an independent audit of Puerto Rico’s debt in order to transparently and morally restructure it.
The impending crisis has not only revived debate concerning the island’s status, but on the issues of corruption and inequality as well. Puerto Rico’s median household income is $18,626, compared to $56,515 on the mainland United States, and the average unemployment rate from 2010 to 2016 was 14 percent. The economic and social situation in Puerto Rico is so dire that many residents are leaving the island. According to the Institute of Statistics, 89,000 people emigrated in 2015.
The perspectives of Puerto Ricans are plastered throughout street walls all over the island. Feelings of distrust and anger towards the Board are reflected in works of graffiti that read “Promesa es Pobreza” (PROMESA is Poverty) and “No a la Junta” (No to the Board). Many people in the streets, buses, restaurants, and parks are eager to discuss the economic crisis, the debt, and the future, adamantly expressing their rejection of the Board and the austerity measures it promotes.
Most people underscore the importance of auditing the debt as a first step towards transparency and accountability. As one Puerto Rican, an Uber driver named Elisa, put it, “even if spending cuts are in place and even if the unelected board implements all the austerity measures possible, we would still not have enough to pay the debt. There is a real chance that an audit would reduce the debt to a much more manageable amount.”
Nevertheless, Governor Rosselló signed a law eliminating the commission charged with auditing the debt (The Puerto Rico Commission for the Comprehensive Audit of the Public Credit), claiming any issue regarding the illegality of the debt should be treated in court, not in a commission. He also stated that spending 2 million dollars in the commission was “incompatible” with his administration. While he did not want to spend money on the commission, he was quick to release about 8 million dollars for the plebiscite. This does not come as a surprise as many politicians and people from the private sector could be implicated if illegality is confirmed. Fortunately, a group of concerned citizens and former members of the commission have taken over the job of promoting transparency and accountability of the public debt, a task previously delegated by law to the commission. The group, called The Citizen Front for the Audit of the Debt, works tirelessly as a non-profit organization to demand and oversee an audit.
There are several reasons why auditing the debt is the best course of action. First, it has been proven successful elsewhere. In 2014, France’s Committee for a Citizen’s Audit on the Public Debt found that 60 percent of the public debt was illegitimate. Similar audits have success in Spain, Ecuador, and Greece. Second, the people who are paying the debt via cuts to education and healthcare deserve to know what they are paying for. Third, an audit, by definition, would show exactly how the debt was incurred, for what, and whom it benefited. Finally, the now defunct commission found probable cause in a 2016 preliminary report that some of Puerto Rico’s debt could in fact have been fraudulent and recommended continued investigation.
Neither PROMESA nor statehood will solve Puerto Rico’s economic and social crisis. While PROMESA made it possible to protect Puerto Rico from lawsuits and to initiate a process similar to bankruptcy procedures, most of the weight is falling on the shoulders of ordinary citizens like Elisa. The bill practically and symbolically corroborated the colonialist relationship between the United States and Puerto Rico, especially through the establishment of the undemocratic and authoritarian Fiscal Control Board. Cuts to healthcare, education, and public spending in general, at the Board’s request, are only going to make matters worse. Without a debt audit and a restructuring plan that brings the debt to sustainable levels, PROMESA will indeed just lead to more pobreza.

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Puerto Rico governor defies oversight board on worker furloughs

Aug 4, 2017 | The Hill

By Rafael Bernal

Puerto Rico Gov. Ricardo Rosselló (D) on Friday said he would not implement a government worker furlough mandated by the federally appointed Fiscal Oversight Board.
The oversight board, established by the Puerto Rico Oversight, Management, and Economic Stability (PROMESA) Act, was given control of Puerto Rico’s finances.
The board announced the plan to furlough government workers for two days each month on Friday. The plan would exclude frontline law enforcement personnel, reported Reuters.
But on late Friday afternoon, Rosselló said he will not "accept or execute" the furlough. He said his "administration has defined as public policy the protection of the most vulnerable sectors of our society."
"Activating our economy and stimulating the creation of more and better jobs in Puerto Rico must be a common objective, both for the government and for the Financial Oversight and Management Board," added Rosselló.
"The furlough proposed by the Board would provoke the opposite, increasing the crisis and hitting our People unnecessarily, which is why we will not allow it."
The furlough was set to begin Sept. 1 and continue through fiscal 2018.
Natalie Jaresko, the executive director of the oversight board, said at a public meeting of the board that the government's cost savings proposals left a $218 million budget gap.
The board said furloughs could be scaled back or eliminated if the government saved enough money through its proposed cost-cutting measures.
Puerto Rico passed a last-minute board-approved budget in July.
The island is saddled with nearly $72 billion in debt. The government's inability to pay its debt obligations detonated the fiscal crisis that led to the oversight board.
Since the establishment of the board, there had been no major public disagreements with the government. Both the board and the government have been criticized by representatives of Puerto Rico's bondholders, who are upset over bankruptcy-like protections taken by the island in May.
"To the members of the Financial Oversight and Management Board, I encourage you once again to take the path of good judgment and prudence, instead of the path towards an unnecessary confrontation," said Rosselló Friday.
Members of the House Natural Resources Committee --the committee of jurisdiction over PROMESA -- have said they will hold an oversight hearing after the August recess, but it has not yet been scheduled.

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Puerto Rico oversight board orders furloughs, governor defiant

Aug 4, 2017 | Reuters

By Daniel Bases

Puerto Rico's federally appointed financial oversight board said on Friday it will institute a two-day per month work furlough for government employees, but a defiant Governor Ricardo Rossello rejected the measure out of hand.
The plan, which originally envisioned a four-day per month furlough, is set to begin on Sept. 1 and last throughout the 2018 fiscal year in an effort to achieve $218 million in savings. It excludes frontline law enforcement personnel.
Rossello openly challenged the board's authority to impose the belt-tightening measure on the bankrupt U.S. territory, however.
The furloughs are part of the board's efforts to implement fiscal changes and achieve $880 million in savings for "right-sizing" the government this fiscal year and ensuring the island's long-term economic viability.
Natalie Jaresko, executive director of the oversight board, said the government had offered a number of ideas for achieving savings. Speaking during a webcast of the board's ninth public meeting, she said the government had fallen short of meeting required money-saving goals, however.
Furloughs could be scaled back or eliminated early if sufficient savings are achieved per the government's fiscal plan, the board said.
Rossello, in a televised address late on Friday, said the furloughs were unjustified and unnecessary. He also highlighted, in a statement released by his office, public sector cutbacks and budgetary savings that resulted in higher than expected financial reserves.
"I do not accept nor will I execute the furlough submitted today by the Financial Oversight and Management Board," Rossello said.
The board was created by the federal Puerto Rico rescue law known as PROMESA. Rossello said section 205 of the PROMESA law means the board can make "recommendations" but not impose changes.
Furloughs would represent a $340 million hit to the economy in the current fiscal year, he said.
Puerto Rico's Treasury Secretary, Raul Maldonado, told Reuters on Wednesday that preliminary tax collections in July, the first month of fiscal 2018, were running $20 million to $30 million ahead of forecast.
But board member Andrew Biggs spoke of the commonwealth's current state of affairs in stark terms during the meeting.
"The simple fact is that the government of Puerto Rico has run out of money," he said.
He added that "the difficult steps of raising taxes and cutting spending" were something that the board and government alike "have no choice but to do."
Puerto Rico is seeking to restructure roughly $72 billion in debt and another near $50 billion in unfunded pension liabilities while it struggles with the flight of residents to the U.S. mainland and a 45 percent poverty rate.
Reforms of the pension system were among the measures discussed at Friday's board meeting. They would include a 10 percent cut in benefits.

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Bondholders Disclose $3 Billion of Puerto Rico Electricity Debt

Aug 2, 2017 | Bloomberg

By Michelle Kaske

An ad hoc group of bondholders that manage $3 billion of Puerto Rico Electric Power Authority debt revealed in court documents how much of the utility’s bonds that each firm holds.
The release follows similar disclosures from bondholder groups owning Puerto Rico’s general obligations and its sales-tax debt and is part of the island’s bankruptcy process that began on May 3. The commonwealth is seeking to reduce $74 billion of debt sold by various agencies.
Prepa, as the power utility is known, filed for bankruptcy last month after a federal oversight board rejected a $9 billion restructuring deal between the agency, the ad hoc group of bondholders and insurance companies. Prepa is the island’s main supplier of electricity.
The amounts that each firm manages, as of July 19, are as follows:
OppenheimerFunds Inc.: $948.7 million of Prepa bonds, including $53.6 million of insured Prepa debt; $1.6 billion of general obligations, including $129 million of insured GOs; $1.96 billion of senior and junior sales-tax bonds, including $130.7 million of insured senior sales-tax debt; $390.3 million of Highways and Transportation Authority debt, including $141.2 million of insured Highways bonds
Franklin Advisers Inc.: $712.8 million of Prepa bonds, including $5 million of insured Prepa debt; $368.4 million of general obligations, including $73.6 million of insured GOs; $747.5 million of sales-tax bonds, including $693.7 million of junior sales-tax debt
Marathon Asset Management LP: $440.8 million of Prepa bonds and a $137.5 million term loan under a ScotiaBank fuel line credit facility
BlueMountain Capital Management LLC: $392.9 million of Prepa bonds and a $6 million long credit default swap maturing December 2020, a $3 million short credit default swap maturing June 2019 and a $12 million short credit default swap maturing June 2020
Angelo, Gordon & Co. LP: $321.9 million of Prepa bonds; $165,000 of general obligations
Knighthead Capital Management LLC: $235.8 million of Prepa debt; $3.8 million of Highways bonds

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Is Congress’ plan to save Puerto Rico working?

Jul 31, 2017 | Associated Press

By Edwin Melendez

A year ago, Congress cobbled together a plan to try to save Puerto Rico from its US$123 billion debt and pension crisis without costing American taxpayers a penny.
The law, signed by former President Barack Obama on June 30, 2016, effectively steered Puerto Rico into bankruptcy-like proceedings in federal court to prevent a massive default, while saddling the commmonwealth with an oversight board to ensure it put its fiscal house in order.
Though the vote was bipartisan, critics called it a “Band-Aid” that would do little to solve Puerto Rico’s core problems: unsustainable debt that has kept the country mired in recession for almost a dozen years. As Democratic Sen. Bob Menendez, the plan’s fiercest foe, put it:
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“Mark my words: if we don’t seize this opportunity to address this crisis in a meaningful way, we’ll be right back here in a year from now picking up the pieces.”
So a year later, have his words proven prescient? Or has the law – known by the acronym PROMESA – lived up to its promise to “create the necessary foundation for economic growth and to restore opportunity to the people of Puerto Rico”?
The Financial Oversight and Management Board that Congress established to manage Puerto Rico’s finances released its first progress report on July 31. At Hunter College’s Center for Puerto Rican Studies, we’ve also been keeping score, as well as tracking the human side of the crisis.
Before Congress passed the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), the Caribbean island – located about 1,000 miles southeast of Miami – had run out of options.
The end of a federal tax exemption for U.S. companies to build factories in Puerto Rico precipitated the crisis, while the global financial meltdown in 2008 made it a whole lot worse. Shut out of the credit markets after its debt was downgraded to “junk,” a government default loomed.
While U.S. municipalities can declare bankruptcy via Chapter 9, Congress in 1984 excluded Puerto Rico from seeking its relief for reasons that still elude most analysts, including me.
But with PROMESA, Puerto Rico got the breathing room for debt restructuring it so desperately needed. To judge the law’s effectiveness, however, we must determine how far it’s come in resolving the commonwealth’s three key problems: too much debt, a budget that bleeds red and – most importantly – jump-starting a battered economy.
One of the primary goals of PROMESA was to steer negotiations with creditors and eventually lead to a restructuring of $74 billion in crushing debt and $49 billion in unfunded pension obligations.
In May, Puerto Rico formally filed for bankruptcy under the special court process PROMESA created, the first time a U.S. state or territory has done so. This will allow the island to significantly reduce how much it must pay its creditors – such as mutual funds, hedge funds and individual Puerto Ricans and Americans – and retirees to whom it owes pensions. Ultimately, a New York federal judge will determine who gets what.
Puerto Rico will also have to fend off several lawsuits filed by creditors and bond insurers, some of which allege the debt-cutting plans violate the U.S. Constitution.
The seven-member Financial Oversight and Management Board should be commended for being sensible toward the need to restructure the island’s unsustainable debt levels. That process, so far, is working as intended but is far from conclusive.
That brings us to fiscal policy and the budget.
In October 2016, the Financial Oversight and Management Board revealed that Puerto Rico faced a $67.5 billion budget gap through 2026. In March, it approved a plan submitted by Gov. Ricardo Rosselló to narrow the gap by about $40 billion over a decade by, among other things, cutting health care, reducing certain pension benefits by 10 percent and putting government employees on furlough.
Simply put, punishing austerity seems unavoidable, particularly as the population continues to decline, which makes the fiscal problem worse by reducing tax revenue. About 500,000 people have left the island since the crisis began, according to my center’s research.
That’s because austerity is already sinking deep into the lives of Puerto Ricans. Funding to schools, hospitals and other essential services has been severely cut, more than 150 schools have closed and teachers, doctors and scientists are part of the island’s exodus heading for the mainland.
The plan also calls for a sharp drop in debt payments to creditors – to about 25 cents on the dollar – until the bankruptcy court rules on final amounts. Yet, despite progress on debt restructuring, the Financial Oversight and Management Board has become the face of austerity. Public opinion, at times hopeful, has given way to a growing chorus of voices against austerity, protests and other forms of resistance to the undemocratic nature of the Financial Oversight and Management Board.
Unfortunately, the fiscal plan’s austerity will make it harder to achieve the most important goal: sustainable economic growth.
Puerto Rico has endured a debilitating economic recession since 2006, the year the tax incentive for U.S. companies ended, driving unemployment as high as 17 percent (it’s currently 10 percent) and poverty to about 46 percent. It is estimated that up to 84 percent of children live in poverty areas.
The austerity in the plan, based on the government’s own projections, is expected to reduce economic growth of 2 to 3 percentage points annually over the next five years.
With numbers like these, one would think that Congress would be hard at work devising urgent economic development measures to rapidly boost growth. Unfortunately, this has not happened. Congress has yet to act on a report prepared by a bipartisan task force it set up as part of PROMESA, which laid out several key recommendations, such as shoring up Medicaid, extending the earned income tax credit to the island and supporting business development. The Financial Oversight and Management Board, in its report, also encouraged Congress to do more to stimulate Puerto Rico’s economy.
As for the Financial Oversight and Management Board and Puerto Rico’s government, not a single major economic development project has been presented to the board, even though PROMESA explicitly gives it power to fast-track “critical infrastructure” projects that create jobs and jump-start the economy.
The issue is now getting tangled up in Puerto Rico’s separate (and controversial) bid for statehood.
In a recent referendum plagued by poor turnout, Puerto Ricans voted to become the 51st state, which some argue is necessary to resolve its fiscal woes because it’ll lead to a lot of benefits. The General Accounting Office estimated that parity in federal programs will add up to $10 billion in transfers to the island. But bondholders and others are objecting to Congress’ consideration of statehood until the debt crisis is over.
They’re right about one thing: The likelihood that Congress would consider granting statehood to a bankrupt state or as a solution to the economic challenge via some kind of bailout is slim to say the least. For advocates of statehood, as it is for advocates of other political status options, the surest way to advance their cause is a revival of Puerto Rico’s economy.
Restructuring the debt and balancing the budget are important steps in that direction, but austerity alone will not solve the problem, just as it hasn’t in Greece. Puerto Rico cannot simply cut its way to solvency. It needs growth.
And to that end, Puerto Rico’s government could begin planning economic initiatives with the private sector, while Congress could act on the task force report, modest steps that could help the island get back on its feet. The data clearly show that it will only become a lot more expensive and politically sensitive.
In fact, solving the economic and fiscal crisis, while mitigating the impact of austerity on the most vulnerable populations, might be the most certain pathway to (finally) solving the political status question.

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In Puerto Rico bankruptcy, mutual funds compete with themselves

Jul 28, 2017 | Reuters

By Nick Brown

U.S. mutual funds that held onto Puerto Rican debt as its economy crept toward collapse could get drawn into battles that pit their own investors against each other, as the island navigates the biggest government bankruptcy in U.S. history.
The reason for the quandary lies in the territory's Byzantine capital structure, where 18 public agencies owe a combined $120 billion in bond and pension debt.
Bonds held by the companies' many funds are spread across myriad credits, some in direct competition for recoveries, meaning wins for some investors trigger losses for others.
For OppenheimerFunds and Franklin Advisers, whose combined $10.3 billion in Puerto Rican debt makes them among the island's biggest creditors, negotiating that minefield is particularly important. (For a related graphic, click tmsnrt.rs/2eRyYw3)
The funds say their cross-holdings reflect a long-term commitment to Puerto Rico, and give them more of a stake than other creditors in righting the island's ship. Bankruptcy and municipal bond experts say, however, the competing claims raise questions about whether they can represent investors' best interests.
It adds a wrinkle to already complex restructuring talks, muddying the path to recovery for investors who tied up their savings in Puerto Rico.
Struggling with a 45 percent poverty rate and near-insolvent public healthcare, the island in May filed a form of bankruptcy under the federal 2016 rescue law known as PROMESA, confronting creditors with unique challenges.
"This is not something I've seen in the bankruptcy world," said restructuring expert Drew Dawson.
While it is not rare for a creditor to hold multiple tranches of debt, it is less common when the creditor runs many funds with competing investments, said Dawson, a professor at the University of Miami School of Law.
"You run all these funds - which do you side with?" he said. "If I were an investor, I'd be concerned."
As of April 30, Oppenheimer had about $7.3 billion of total exposure, while Franklin, after offloading some of its Puerto Rico holdings in recent years, had around $3 billion.
Those holdings, based on face value, may not represent exposure for debt bought at a discount, and some of the debt may be insured, shielding the funds from losses.PLAYING TWO SIDES
The island's $17 billion of so-called COFINA debt, secured by sales tax, is the main battleground.
COFINA creditors are locked in litigation with holders of Puerto Rico's general obligation (GO) bonds, with both sides claiming a right to sales tax revenue.
Overall, Franklin and Oppenheimer held $3.2 billion of COFINA as of April 30, more than twice their combined GO holdings. Yet at Franklin, six funds held exclusively GO debt, claims worth a combined $276 million.
Similar clashes exist between senior COFINA holders, who have first claim on the tax revenue, and junior creditors.
Overall, the companies held nearly four times as much junior as senior COFINA debt. Yet Oppenheimer's Rochester Fund Municipals, for example, had $384 million of senior debt and just $83 million of the junior tranche.
Smaller players face similar challenges. The Santander First Puerto Rico Family of Funds ran eight funds each with at least $28 million of COFINA debt. Three of those had at least two-thirds invested in the junior tranche; five had 70 percent or more in the senior class.
Oppenheimer, Franklin and Santander have formed an ad hoc bankruptcy negotiating group, whose strategy so far has been to maximize total returns across portfolios, rather than advocate for funds whose debt may be more senior, according to a Reuters analysis of court filings and public statements by the funds and their advisers.
"Our advocacy is not centered around particular classes of bonds, but around seeking the best overall return for our shareholders," said Kimberly Weinrick, a spokeswoman for Oppenheimer.
A spokeswoman for Franklin declined to comment for this article, while Ann Davis, a Santander spokeswoman, declined to comment on the cross-holdings.One key exception to the alliance: the Franklin funds that hold exclusively general obligation debt have joined a separate negotiating group comprised only of holders of such debt, according to a July 13 court filing.
The GO and mutual fund groups have taken opposing sides in a handful of court battles, which could prompt questions from a judge or other creditors as to which side Franklin is more closely aligned with, Dawson said.
Cross-holdings are not prohibited in bankruptcy, though judges have the authority to decide whether a party is too conflicted to vote on a restructuring plan, he added.
Rival creditors, too, could try to exploit apparent conflicts to limit the mutual funds' bargaining clout. In June, hedge fund owners of senior COFINA bonds asked a bankruptcy judge to bar the mutual funds from a role in nominating a COFINA fiduciary in settlement talks, citing their "undeniable conflict."
The judge told the sides to try to resolve the issue internally, and talks continue.SENSIBLE BUT RISKY
For years, mutual funds piled into Puerto Rico's debt because it was exempt from local, state and federal taxes and because until PROMESA's passage in June 2016, the island was barred from declaring bankruptcy.
Court documents and public statements from the mutual fund negotiating group suggest it tends to side with classes of debt where its funds have the most exposure.
For example, the funds have primarily advocated for the COFINA junior tranche, where they have the greatest exposure, at the expense of senior COFINA and GO creditors.
They have also fought hard for a restructuring deal at Puerto Rico's power utility PREPA, which owes Oppenheimer and Franklin a combined $1.6 billion, even as Puerto Rico's federally-appointed oversight board warned that a generous deal could hurt Puerto Rico's broader economy.
The strategy is sound, but risky, said Tom Metzold, who spent nearly three decades as a municipal bond portfolio manager at Eaton Vance. By fighting for junior bondholders, the funds raise the odds of a settlement in which everyone gets a fair deal, given that senior creditors are already well represented, Metzold said.
Yet it also opens the funds to criticism that they did not fight hard enough for their senior-most holdings, he said.
"A number of people will be performing autopsies" on whatever decisions the funds make, Metzold said.
"I'm glad I'm not in their shoes."

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Top adviser to Puerto Rico governor resigns, 'in no way pressured'

Jul 20, 2017 | Reuters

By Nick Brown

Elias Sanchez, Governor Ricardo Rosselló’s liaison to Puerto Rico’s financial oversight board who has been criticized over his financial disclosures, resigned on Thursday.
Sanchez, a trusted adviser to Rosselló who was effectively the face of the Puerto Rican government on issues concerning the U.S. territory's massive debt restructuring, said in an interview that he wanted to focus on opportunities in the field of law.
Rossello appointed Christian Sobrino Vega, president of Puerto Rico's Government Development Bank (GDB), as Sanchez's replacement on the board. In a statement, the governor called Sobrino "instrumental in the success of our administration."
Puerto Rico is in a historic economic crisis, with $72 billion in debt it cannot repay, a 45 percent poverty rate, and insolvent public pensions. Its finances are under the oversight of a federal board that has been given the task of helping the island craft and follow a blueprint for its fiscal turnaround.
As Rosselló’s delegate on the board, Sanchez, a former lobbyist, had become a favorite target of investors unhappy with potential cuts to debt repayment.
Specifically, Sanchez was disparaged for his financial disclosure forms - a requirement of all board members. According to critics, he did not provide enough information on the forms about his sources of income and potential conflicts of interest related to his role on the board.
Espacios Abiertos, a Puerto Rico-based nonprofit promoting transparency in government, said in a report this month that Sanchez's disclosures were more deficient in those areas than any of the other seven board members.
One adviser to a major Puerto Rico creditor group said many stakeholders "found it extremely concerning that his disclosures were so sparse."
"Not only does that undermine the board and Governor Rosselló's commitment to transparency, but it raises many questions when you've been in the lobbying sector," said the adviser, who spoke on condition of anonymity.
Sanchez, who had worked as a lobbyist in Puerto Rico, did not say whether he planned to return to lobbying.
"Right now I’m evaluating every alternative that I might have," in Puerto Rico and Central and South America, Sanchez said in a phone interview on Thursday morning.
Sanchez insists the decision to resign was his alone. "In no way was I pressured by anyone," he said, adding that while he may have come under attack, he is "very comfortable with everything" he did on the board to represent the best interests of the people of Puerto Rico.
In a statement issued in Spanish, Rossello praised Sanchez’s “great professional skills.”
“I wish to thank (Sanchez) for his willingness to serve Puerto Rico, his commitment to our administration and, on a personal level, our respect and esteem,” Rossello said.
As a non-voting member on the board, Sanchez did not have a direct role in board decisions. However, he acted as the governor's eyes, ears and voice on the board, helping him form positions on financial matters, and communicating them to the board and the public.
Jose Carrion, the chairman of the oversight board, said Sanchez "was always available, committed and dedicated to represent with determination the governor’s postures before the Board."ALWAYS ENVISIONED LEAVING
The liaison position is unpaid, and Sanchez was technically not a government employee.
A spokesman for the governor said Sobrino will continue as president of the GDB, the island's now-defunct fiscal agent, which is being wound down as part of a liquidation agreement with creditors.
Sobrino, a lawyer, worked as a compliance officer for drug company AbbVie before his appointment to the GDB last December.
In May, Puerto Rico filed the largest bankruptcy in U.S. municipal history, sparking hard-fought litigation between the board and Puerto Rico’s creditors over the fates of the island’s agencies and the loans that back them.
The oversight board, created under the federal 2016 Puerto Rico rescue law dubbed PROMESA, certified a turnaround blueprint for Puerto Rico in March.
Sanchez said he had always envisioned leaving once the plan was in place.
The board and Rossello’s administration have not always seen eye to eye, with the governor resisting some of the board’s proposed austerity measures.
Sanchez attributed the tension to “growing pains associated with a new framework.”
“Puerto Rico had never had something like [PROMESA] before,” he said. “Were we not aligned in certain circumstances? Yes ... In the net, it’s been a positive experience.”

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Puerto Rico board approves liquidation of Government Development Bank

Jul 17, 2017 | Nick Brown

By Nick Brown

Puerto Rico's financial oversight board late on Friday approved a plan to wind down the island's Government Development Bank (GDB), bringing the defunct fiscal agent a step closer to settling more than $5 billion in debt.
The oversight board, appointed by federal lawmakers to steer Puerto Rico through a historic crisis, said in a joint statement with government leaders it endorsed the plan to restructure GDB debts under Title VI of PROMESA, a federal Puerto Rico rescue law passed by the U.S. Congress last year.
GDB officials lauded the deal, which will split GDB's assets among depositors and lenders in an effort to avoid a protracted bankruptcy.
"Today's development represents an important step forward in the restructuring of GDB," Christian Sobrino, the bank's president, said in the joint statement. "It also represents significant progress in Puerto Rico’s economic recovery."
Once the primary fiscal agent for Puerto Rico, in charge of holding deposits from government agencies and municipalities, GDB has been a shell entity since the U.S. territory's former governor declared a state of emergency in April 2016.
Its wind-down could mean losses of as much as 45 percent for some bondholders.
The bank's plight is a microcosm of broader strife on the island, which in May filed the largest bankruptcy in U.S. municipal history. It has nearly $72 billion in debt and a $50 billion pension gap, to go along with a 45 percent poverty rate and near-insolvent public health systems.
GDB's liquidation is not a done deal. Creditors must now vote on the plan, though the bank announced in June it had secured support from a majority of stakeholders.
A federal court would then need to approve the deal under PROMESA and Puerto Rican lawmakers would have to pass legislation effecting the deal.
The plan would split the bank's assets between two entities.
The first, holding $5.3 billion in GDB assets, would issue three tranches of debt with different protections in exchange for varying principal reductions. Beneficiaries would include municipal depositors and bondholders like Avenue Capital Management, Brigade Capital Management, and Fir Tree Partners.
The second entity, funded with public entity loans and $50 million in cash, would benefit all other depositors.

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Puerto Rico Oversight Board approves GDB debt restructuring

Jul 17, 2017 | Bond Buyer

By Robert Slavin

The Puerto Rico Oversight Board approved a negotiated plan for restructuring the Government Development Bank for Puerto Rico’s $4.8 billion in debt.
The deal offers three different bond restructurings that reduce principal by 25% to 45%. Bondholders will get to choose the restructuring deal for their bonds. The options with bigger principal reductions offer bigger percent coupons and stronger security for repayment.
The board also approved an amended fiscal plan for the GDB, according to the Friday announcement. The plan is meant to oversee the winding down of the bank’s operations. The GDB submitted a fiscal plan on April 28. An amended fiscal plan was submitted to the board on June 30.
“Today’s development represents an important step forward in the restructuring of the GDB,” said GDB President Christian Sobrino Vega. “It also represents significant progress in Puerto Rico’s economic recovery.”
Before the passage of the Puerto Rico Oversight, Management, and Economic Stability Act, the GDB had been making loans to Puerto Rico's semi-autonomous authorities for decades. It had also overseen and advised the government's and authorities' sale of bonds to outside parties. The act created a federal oversight board to supervise the restructuring of the debt of Puerto Rico's government and authorities.
Puerto Rico's Fiscal Agency and Financial Advisory Authority has taken over the GDB's role as chief financial advisor to Puerto Rico's government and authorities. It operates out of the same building as the GDB.
The board’s approval of the restructuring and plan “are the result of open dialogue, creativity and the willingness of all parties to reach a restructuring agreement that is fair to all parties,” said FAFAA Executive Director Gerardo Portela Franco.
The board has approved the restructuring deal under Title VI of PROMESA. Under the act, the deal is subject to approval by the U.S. District Court for Puerto Rico and by each creditor class.
In mid-June holders of over 50% of the outstanding bond par value committed to support the deal. By signing the agreement, creditors have been obligated to support and vote for the agreement.
At least 50% of the creditor class and 66% of those choosing to vote within each class would have to approve the deal for it to go forward under PROMESA.
The GDB, some of its creditors, and Puerto Rico’s Fiscal Agency and Financial Advisory Authority entered into a restructuring support agreement on May 17. On June 30 FAFAA asked the board to approve the agreement.
The board’s approval of the GDB debt restructuring comes after the board in late June rejected a debt restructuring support agreement for the Puerto Rico Electric Power Authority.
The board sent PREPA into a Title III bankruptcy process overseen by a judge. That case has started and is overseen by the same judge overseeing the restructuring of Puerto Rico’s central government debt.

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Puerto Rico debt mediation gets started

Jul 12, 2017 | Bond Buyer

By Robert Slavin

A mediation process in a restructuring of $47.5 billion of Puerto Rico debt got underway Wednesday in a federal court in downtown Manhattan.
The meeting was part of a Title III bankruptcy process for the general obligation, Puerto Rico Sales Tax Financing Corp. (COFINA), Employment Retirement System, Highways and Transportation Authority, and Puerto Rico Electric Power Authority bonds.
Some municipal analysts have hailed the mediation process as a good way to advance to a reasonable deal to restructure the debt. As of March 2017 a total of $13.3 billion of commonwealth GOs, $17.9 billion of COFINAs, $4.2 billion of HTA, $3.1 billion of ERS, and $9 billion of PREPA debt were outstanding.
Title III is a bankruptcy process authorized by last year's Puerto Rico Oversight, Management, and Economic Stability Act.
Mediation team leader Barbara Houser declared that the first meeting would be organizational and non-substantive in nature. It was closed to the public and the media.
The court allowed no more than four people to represent each creditor or creditor group.
For the general obligation and COFINA cases, Judge Laura Swain required 19 parties to attend the first session. They are not required to participate in further mediation sessions.
Among the groups required to attend were: the Ad Hoc Group of General Obligation Bondholders, Assured Guaranty Corp., the Official Committee of Retired Employees of the Commonwealth of Puerto Rico, and the Service Employees International Union.
Those who didn’t attend Wednesday’s session but who would like to attend future sessions can contact law clerk Matt Hindman at hindmanDPR@ao.uscourts.gov.
While Swain is handling the case through the United States District Court for the District of Puerto Rico, she is normally based at the United States District Court for the Southern District of New York. The Manhattan building for the latter was used for the mediation session.
The mediation in the cases is taking place separately from the court hearing process.
On June 14 Swain named five judges to run the mediation sessions.

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Puerto Rico’s Broken Promesa

Jul 9, 2017 | Wall Street Journal

By Mary Anastasia O'Grady

Puerto Rico’s government-owned electricity monopoly—known by the acronym Prepa—filed for bankruptcy protection July 2. It did so even though it had negotiated a restructuring agreement with creditors that would have saved $2.2 billion in debt service that could have been used to invest in modernizing the utility.
In a democratic, market economy that would be weird. But Puerto Rico is now run by a seven-member, unelected federal board under the Puerto Rico Oversight, Management and Economic Stability Act, or Promesa, passed by Congress last year. On June 27 that board unilaterally rejected the restructuring agreement, leading the company to declare bankruptcy.
The board’s takedown of the Prepa deal is part of its wider drive to excuse Puerto Rico from tough negotiations with creditors and instead give creditors a crew cut. An adviser to the Ad Hoc Group of General Obligation Bondholders of Puerto Rico told me in April they were close to a deal with the commonwealth in which each side would make concessions. But the oversight board came in at the 11th hour to stop negotiations and imposed a fiscal plan that leaves minimal funds for debt service.
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Behind these decisions is a belief that if the commonwealth can clear its balance sheets by giving creditors only a fraction of what they are owed, Puerto Rico’s access to the capital markets will resume. Seriously.
Advocates of empowering this Washington junta say bondholders are getting what they deserve for buying the triple-tax-exempt debt even though the island’s fiscal picture was deteriorating. Yet even before Promesa, bondholders were on schedule to take losses. The difference is that under the shelter of federal intervention, the rule of law has been politicized and creditors have been stripped of their rights. Bondholders are crying foul, but the real losers are Puerto Ricans.
Puerto Rico’s constitution stipulates that general-obligation bondholders must be paid before San Juan uses its revenues for any other purpose. By leaving bondholders only the budgetary crumbs, the fiscal plan effectively green-lights the violation of the constitution. It also violates the Promesa requirement that the board approve a plan that “respect[s] the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws or agreements . . .”
Promesa also recognized the Prepa restructuring by expressly exempting any “preexisting voluntary agreement.” Yet the board ignored this constraint on its power when it dissolved the agreement last month, as Assured Guaranty has noted in a complaint filed in federal district court in Puerto Rico on June 26.
Four members of the oversight board now say they nixed the Prepa agreement because they have a plan to privatize the company and the restructuring deal would scare off investors.
In a June 23 op-ed in the Puerto Rican daily El Nuevo Día, Stephen Spencer, financial adviser to the Prepa Bondholders Group—whose members own some 40% of the company’s bonds—rejected the claim that the restructuring would mean the company could not attract private capital.
Even if the board is right, it is hardly a justification to trample creditor rights or violate the Promesa law. Doing so increases legal uncertainty on the island and is unlikely to produce the desired result of faster growth through investment. Three years after Detroit declared bankruptcy, it is still not able to access the capital markets without the backing of the state of Michigan. Puerto Rico has no such backstop.
The quid pro quo for bankruptcy was supposed to be fiscal discipline. But that’s not happening, according to Ojel Rodríguez, a research analyst for the San Juan think tank Fundación Libertad. In a March post co-authored with his colleague Andresen Blom, he said “the government has defined most of the budget as essential services, meaning that any serious restructuring of the island’s finances amounts to basically reducing [debt service] . . . often directly in conflict with Promesa and the Puerto Rican Constitution.” On Wednesday Mr. Rodríguez told me by email that rather than seriously cutting expenditures, the political class on the island is now “passing the buck to hard-pressed taxpayers.”
In a June 13 letter to oversight board Chairman Jose B. Carrión III, Sen. Tom Cotton of Arkansas warned that the board’s fiscal plan “creates a dangerous precedent that property and investor rights are open to interpretation in a fiscal crisis.” Mr. Carrión responded in a June 22 letter that the plan is the best alternative. In a telephone call last week Mr. Cotton told me that he remains concerned about the board’s treatment of the rule of law.
Bringing fiscal discipline to Puerto Rico will be politically costly. Stiff-arming creditors is more fun. But in an economy heavily dependent on access to capital markets, it’s bound to produce more pain than gain.

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Puerto Rico mediator sets meeting with stakeholders

Jun 28, 2017 | Reuters

By Nick Brown

The chief mediator in Puerto Rico’s massive bankruptcy set an initial meeting with the U.S. territory and its creditors for July 12, saying it would be introductory, rather than substantive.
Federal Judge Barbara Houser, speaking at a court hearing in San Juan on Wednesday, said this meeting, to be held in New York, would be mandatory for Puerto Rico’s stakeholders, though mediation itself will be voluntary.

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Puerto Rico judge nixes negotiation plan in debt battle

Jun 28, 2017 | Reuters

By Nick Brown

The judge in Puerto Rico's landmark bankruptcy on Wednesday shot down a proposal to appoint fiduciary agents to represent warring creditors in debt restructuring talks.
Judge Laura Taylor Swain, at a hearing in San Juan, denied the proposal by the federal board in charge of managing Puerto Rico's finances, giving credence to concerns of some creditors that the board cannot be objective in certain investor disputes.
Puerto Rico, battling more than $70 billion of debt and a decade of economic contraction, last month filed the biggest bankruptcy in U.S. municipal history.
A major clash in the case is between creditors of Puerto Rico's central government and creditors of its sales tax authority, COFINA. Together, they own about half the island's debt, and each side claims an ironclad right to repayment from Puerto Rico's sales tax revenue.
The board had proposed appointing agents to advocate for each side in settlement talks, but the plan would have given the board a hand in selecting the agents.
This riled COFINA holders who believe the board plans to side with GO creditors, and feared the COFINA agent would not be independent.
Swain, in her bench ruling, raised similar concerns, in a nod to the board's delicate position.
The board's job is to help Puerto Rico's government grow its economy and regain access to bond markets. Swain suggested a COFINA agent beholden to the board might not be able to advocate for the best possible recoveries for COFINA, if doing so could squeeze Puerto Rico's government long-term.
"Maximizing the return for COFINA might get tied up in the notion that Puerto Rico needs to be healthy in [later] years, and is not solely a question of grabbing everything that’s on the table," Swain said, instructing sides to confer on a new approach.
Separately at Wednesday's hearing, federal Judge Barbara Houser, who is leading a team of mediators in Puerto Rico's bankruptcy, set an initial meeting with the U.S. territory and its creditors for July 12 in New York.
Houser, addressing the court at the opening of the hearing, said the meeting would be introductory, not substantive, and would be mandatory for all stakeholders.
Houser said mediation could save time and money in the case. Professional fees in the massive bankruptcy are expected to reach the hundreds of millions of dollars.

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5 Federal Judges To Mediate Puerto Rico Bankruptcy Fights

Jun 14, 2017 | Law 360

By Alex Wolf

A team of five sitting federal judges across several jurisdictions was appointed on Wednesday to help mediate issues arising from Puerto Rico's massive debt restructuring proceedings, with U.S. Bankruptcy Judge Barbara Houser of Texas' Northern District to serve as leader of the group.

The order and notification issued by U.S. District Judge Laura Taylor Swain, a New York federal jurist picked to oversee Puerto Rico’s pseudo-bankruptcy, states that the availability of distinguished judges to serve as mediators will “further the goal of the successful, consensual resolution of the issues raised in these debt adjustment proceedings.”

Currently, Judge Swain is overseeing four different cases filed on behalf of the Puerto Rican government and some of its public corporations under Title III of the 2016 Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA. The cases present a web of complicated payment priority claims and constitutional issues over how to restructure the territory’s $74 billion bond debt using an untested legal process.

According to Judge Swain, the law provides for the formation of a “mediation team” of judges “who will be available to facilitate confidential settlement negotiations of any and all issues and proceedings arising in these cases.”

In addition to Judge Houser, the roster of mediators includes Circuit Judge Thomas Ambro of the Third Circuit, Senior U.S. District Judge Nancy Atlas of Texas’ Southern District, U.S. Bankruptcy Judge Christopher Klein from the Eastern District of California and Senior U.S. District Judge Victor Marrero — who, like Judge Swain serves on the bench of New York’s Southern District.

“Each of these dedicated public servants has substantial judicial and other professional experience in complex financial matters, including insolvency proceedings, and will be designated, through the intercircuit assignment procedures of the Judicial Conference of the United States, to serve as a judicial mediator as needed in these cases,” the order states.

The mediation process will be explained in further detail at a hearing in San Juan on June 28, and thereafter the appointed mediators will identify issues to be addressed and the order in which to address them. Any matters handled through the mediation process will be done so confidentially and require good faith engagement by parties that wish to utilize the alternative dispute resolution process, Judge Swain said.

According to the order, neither the public nor Judge Swain will be privy to the positions taken by parties that participate in the process.

Any objections to the judges picked to mediate creditor disputes must be filed by June 20.

Puerto Rico began its court-monitored restructuring process with about $74 billion in public debt and an additional $49 billion in pension liabilities.

The act enabling the territory to restructure its public debts in a way similar to bankruptcy was signed into law by former-President Barack Obama last year.

The Puerto Rico oversight board is represented by Proskauer Rose LLP and O'Neill & Borges LLC.

The restructuring case is In re: Commonwealth of Puerto Rico, case number 3:17-bk-03283, in the U.S. District Court for the District of Puerto Rico.

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Judge Swain appoints mediation team for Puerto Rico’s bankruptcy cases

Jun 14, 2017 | Caribbean Business

By Luis Valentin Ortiz

Federal bankruptcy Judge Laura Taylor Swain ordered Wednesday the designation of five federal judges who will act as mediators in Puerto Rico’s Title III bankruptcy cases.
The group will seek to “facilitate confidential settlement negotiations of any and all issues and proceedings arising in these cases,” reads the order entered today by Judge Swain.
The mediation team would be led by Chief Judge Barbara Houser of the U.S. Bankruptcy Court for the Northern District of Texas. She would be joined by Judge Thomas Ambro of the U.S. Court of Appeals for the Third Circuit, Senior Judge Nancy Atlas of the U.S. District Court for the Southern District of Texas, Judge Christopher Klein of the U.S. Bankruptcy Court for the Eastern District of California, and Senior Judge Víctor Marrero of the U.S. District Court for the Southern District of New York.
According to the order, Judge Houser will explain the mediation process during the June 28 hearing to be held in the federal district courtroom in San Juan, and during which all five judges would be officially appointed. Then, the team of judges will identify issues related to the restructuring of the commonwealth’s debt and how each one of these will be addressed.
The process will be confidential “and separate from, and will proceed concurrently with, the adjudication of issues and proceedings in these Title III cases,” reads the document. Participation in mediation sessions will be voluntary, although all parties would be required to discuss and submit information that will help the mediation team to identify what are the material issues related to Puerto Rico’s debt restructuring.
Objections to the appointees must be sent, via email and confidentially, to Judge Swain by June 20.
It would be the second time the commonwealth and its creditors will try the mediation mechanism in a bid to strike some sort of agreement that could facilitate the island’s debt-restructuring process. Prior to the filing of the central government’s Title III petition and at the request of the island’s financial control board, the commonwealth and two of its major creditor constituencies—the general obligation (GO) bondholders and Sales Tax Financing Corp. (Cofina) creditors—held mediation sessions that were unsuccessful.
One dispute that has come to forefront in defining the future of Puerto Rico’s bankruptcy is the GOs versus Cofina fight, and whether the commonwealth can tap into sales tax revenues that back Cofina bonds. Cofina creditors argue these pledged funds are not available to the government, while GOs claim the money belongs to the commonwealth and is thus available to cover payments of constitutionally protected debt.
A solution to the GO-Cofina conflict could pave the way for completing the restructuring of a large chunk of the island’s $73 billion debt load, as both credits account for roughly $30 billion of the outstanding principal amount.

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Stockton bankruptcy judge among five tapped to mediate Puerto Rico debt fights

Jun 14, 2017 | Reuters

By Nick Brown

The five-judge team tapped to mediate a slew of thorny legal fights in Puerto Rico's massive bankruptcy will include the judge who presided over Stockton, California's 2012 bankruptcy and Puerto Rican-born federal Judge Victor Marrero.
Judge Laura Taylor Swain, who is presiding over the bankruptcy, revealed the mediation team in a court order on Wednesday.
The group will be led by Judge Barbara Houser, the chief judge for the federal bankruptcy court in Dallas, and will include Judge Marrero, of the federal court in New York, and Judge Christopher Klein, the Sacramento-based federal bankruptcy judge who oversaw Stockton's restructuring.
Circuit Judge Thomas Ambro, of the Third Circuit U.S. Court of Appeals, and Senior District Judge Nancy Atlas, of the U.S. federal court in Houston, will round out the team.
Puerto Rico, the U.S. territory with $70 billion of debt and a 45 percent poverty rate, in May filed the biggest bankruptcy in U.S. municipal history. The case also promises to be one of the messiest, as already several investors have begun staking competing claims to the island's limited revenue sources.
The biggest fight is between the two largest creditor factions: holders of $18 billion in general obligation debt, which carries a constitutional guarantee, and more than $17 billion of bonds issued by COFINA, Puerto Rico's sales tax authority, backed by the tax revenue COFINA collects.
Both groups say they have an ironclad claim on the COFINA revenue.
Swain, in her order, said participation in mediation would be voluntary, but that all parties would "be required to engage in good faith in preliminary discussions with representatives of the mediation team."
The team, in turn, would "develop a list of issues to be addressed."
In addition to Stockton, Judge Klein is known for presiding over the 2014 Chapter 11 bankruptcy of that city's Roman Catholic diocese.
Judge Marrero, born in Santurce, Puerto Rico, earned his law degree in 1968 from Yale Law School and has been a judge since 1999.

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Puerto Rico creditors open to mediation in bankruptcy court

May 17, 2017 | Reuters

By Nick Brown

Puerto Rico's main creditors, meeting before a U.S. bankruptcy judge in the largest public finance restructuring case in history, are interested in continuing mediation settlement talks to resolve the island's unpayable $70 billion debt bill.
In the first hearing since the U.S. commonwealth filed for bankruptcy on May 3, a lawyer for Puerto Rico's federal financial oversight board told U.S. District Court Judge Laura Taylor Swain that the two main creditor groups expressed interest in maintaining the discussions while the case proceeds.
Swain, the soft-spoken Manhattan jurist tapped by the U.S. Supreme Court to handle the bankruptcy, said the "scope and scale" of the case is "humbling" and that it "will certainly involve pain" but that "failure is not an option."
She added, before a packed courtroom with an estimated 100 people and two additional overflow rooms, that "devoting all our time to litigation cannot" be a way forward.
Wednesday's hearing marked the start of a process that could take months or years. It is also a culmination of more than two years of bitter debate between Puerto Rico's government, its creditors and federal lawmakers over how the island should rework its debt load that has crippled its economy.
Earlier this month, the U.S. territory's central government entered a modified version of bankruptcy protection created under a federal rescue law known as PROMESA as a way to legally pave the way to cut its general obligation (GO) debt.
The island's sales tax authority, known as COFINA, followed suit days later with its own filing under Title III of the PROMESA law, which provides for the bankruptcy mechanism.
Attorney Martin Bienenstock said the board plans to press holders of GO and COFINA to mediate. The amount of debt held, nearly equally between the two, amounts to roughly $36 billion, or half of the total debt stock of Puerto Rico.
Swain ruled to combined the GO and COFINA Title III filings for administrative purposes.
Defaulted benchmark GO debt due 2035 have not traded on Wednesday and were last quoted with a bid price of 60.
Marcia Goldstein, a lawyer representing MBIA's National Public Finance Guarantee unit, which insures nearly $2 billion in combined GO and COFINA debt, criticized both the government and oversight board for a lack of financial information.
"There needs to be a serious openness about financial data. We are very, very far from that," she told Swain.
Before adjourning, Swain addressed that concern, asking for a status report by mid-June on progress to give creditors better access to financial information and any progress on restructuring negotiations.
The dispute between the GO and COFINA camps is central to working out a restructuring that allows Puerto Rico, and its 3.5 million U.S. citizens, to rebuild an economy wracked by a 45 percent poverty rate, 11 percent unemployment rate and increasing emigration to the mainland United States.
The U.S. commonwealth also suffers from a near-insolvent public health system, having spent the last 10 years in recession with debt piling up to pay for basic services.TONE SHIFT?
Wednesday's hearing represented a shift in tone, as creditor tough-talk during months of out-of-court bargaining gave way to the more conciliatory decorum reserved for proceedings before a judge.
Still, as a parade of lawyers approached the podium to make their cases, it was clear creditors are fighting tooth and nail for their interests.
Issues that would be minor in most bankruptcies fetched many objections on Wednesday, including the island's motion to combine the COFINA and government bankruptcies, which judge Swain granted.
"I admit it's the first time I've" objected to such a motion "in my career," said Dennis Dunne, an attorney for Ambac Assurance Corp, which insures COFINA debt.
COFINA creditors' hopes for repayment hinge on their ability to establish COFINA as separate from the government, as GO creditors argue COFINA revenues are government property reserved for them.
The judge said she would not yet rule on an ongoing dispute over Puerto Rico's motion to allow banks to continue effecting transfers and deposits at the government's direction.
This issue, also normally ministerial, has COFINA creditors worried the government would use such an order to direct banks to claw back COFINA revenues to the general fund when they come due on July 1, which is authorized under a recent Puerto Rico law.
The bankruptcy process will cover about half of Puerto Rico's debt, though other local public agencies are restructuring out of court, and some could enter bankruptcy later.
Bienenstock added that other agencies, including the highway authority PRHTA, will file for bankruptcy "soon."
Retirees, who belong to a system with roughly $50 billion in underfunded pension liabilities, sent a lawyer to the hearing to seek a seat at the negotiating table because of potential changes to their benefits.
Robert Gordon, an attorney for a group comprising 91,000 retirees, argued "they have earned the right to participate in this process."

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