Judge to hear challenges to COFINA disclosure statement

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Puerto Rico bankruptcy Title III Judge Laura Taylor Swain will hear challenges Tuesday to a Puerto Rico Sales Tax Financing Corp. (COFINA) bond restructuring disclosure statement.

Since Nov. 13 at least four parties have submitted challenges to the proposed 621 page disclosure. The disclosure is to be sent to bondholders to inform their vote on the restructuring.

The Ad Hoc Group of COFINA Seniors, which is comprised of investment funds holding those bonds, said in a statement: “The COFINA Plan of Adjustment, which is supported by a large cross-section of local bondholders and elected leaders, will help end years of financial uncertainty and economic hardship in Puerto Rico.… Court confirmation of the plan should be a major step forward on the island's path to reviving its economy and re-accessing the capital markets at the right time."

In the last week the COFINA bond trustee Bank of New York Mellon; several Puerto Rico credit unions acting together; Lehman Brothers Holdings, Inc.; and COFINA subordinate bondholder Stephen Mangiaracina filed complaints against the COFINA disclosure.

BNY Mellon said that the disclosure statement indicates that $332 million will be given to institutional holders of the COFINA bonds who participated in the mediation process that led to a deal. While the money is presumably to compensate the holders for their legal and other costs, the disclosure is silent on how this amount was arrived at or the legal basis for providing them compensation, BNY Mellon complained.

BNY Mellon asked that this be rectified with amendments to the disclosure and noted that COFINA counsel has assured it that this will be done.

Lehman Brothers Holdings said that the proposed disclosure fails to provide enough information for the creditors to make an “informed decision” about the proposed restructuring. “The disclosure statement fails to address in any manner that the debtor cannot redeem, defease, refund or repurchase certain of its existing senior bonds as contemplated under the plan without satisfying a contractual obligation to Lehmann as referenced below…. Lehman also objects to the plan [of adjustment] and disclosure statement to the extent debtor seeks to release, exculpate, or otherwise shield Bank of New York or others from certain claims Lehman may have against it.”

Finally, Lehman complained that the disclosure statement failed to explain other recovery routes that COFINA could have for non-bondholder claims.

The credit unions complained that in their review of the disclosure statement and plan of adjustment (which the disclosure includes as an exhibit), they didn’t find “any information estimating the amount of projected or intended claims for each class.” Nor is there a statement of “what estimated dividend, repayment or exchange on new bonds is to be offered for these [bond] classes.”

The credit unions passed in their complaint the day after the deadline for doing so and this may affect Swain’s willingness to entertain their objections.

Further, the disclosure fails to “address material contingencies and inherent risks associated to ongoing litigation pending before this honorable court.” The credit unions particularly point out that the statement fails to mention the credit unions filed an adversary proceeding in the bankruptcy on March 22 that may impact the “consummation of the plan [of adjustment].”

Bondholder Stephen Mangiaracina said that the disclosure statement “from end to end reeks of denial of due process.” The statement’s claim that individual bondholders can file objections is a “farce.” He said there was no mailing to the bondholders notifying them of the proposed disclosure.

Even if there had been, it is unreasonable to expect them to read 621 pages, figure out how to write objections, and serve the required 24 parties notice by the Nov. 13 deadline.

“Based on cost/benefit consideration, retail COFINA junior bondholders retaining an attorney is a nonstarter,” Mangiaracina said. “It cannot be done, so people have to stand by helplessly while their property is wrongfully taken from them.”

Municipal bankruptcy expert Spiotto said he expected Swain would be able to handle the objections either in the court at Tuesday’s hearing or within the week that followed. As a result, Spiotto said, the creditors’ vote on the restructuring is unlikely to be delayed.

The plan of adjustment carves up the creditors into 10 classes. Three of the classes will not vote and the plan is deeming them to either support the plan or oppose it. At least one of these classes doesn't include uninsured bondholders. The other two, holders of taxable COFINA bonds, are at least dominated by insurance companies that have indicated their support for the deal.

A class is said to have approved the plan if a majority of those voting and two thirds of the par value voted on, vote in favor of the deal. If at least one of the impaired classes votes in favor of the plan, the Puerto Rico Oversight Board will be free to request the Swain to approve the plan of adjustment. Only if that happens can Swain approve the plan.

The board, the government of Gov. Ricardo Rosselló, the local legislature, and the COFINA body proper have indicated their support for the agreement.

In the last week at least three prominent groups have submitted objections to the actual deal rather than to the disclosure.
Tuesday’s hearing will likely focus on the objections on the disclosure, Spiotto said.

Swain will probably not extensively deal with the objections to the deal proper on Tuesday, Spiotto said. She may say that she could consider the objections when it comes time for her to decide on the plan of adjustment. Currently that hearing is scheduled for Jan. 16.

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PROMESA Bankruptcy Puerto Rico Sales Tax Financing Corp (COFINA) Commonwealth of Puerto Rico Puerto Rico
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