Puerto Rico bankruptcy judge may get small holders involved in GO case

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Puerto Rico bankruptcy Judge Laura Taylor Swain indicated a desire to incorporate small holders of general obligation bonds in the legal process for the Oversight Board’s attempt to nullify $6 billion of bonds.

Swain indicated this concern at Wednesday’s Title III bankruptcy hearing held in the federal court for New York City.

On Jan. 14, the board filed an objection to invalidate Puerto Rico’s GO bonds sold in 2012 and 2014. The board argued that the debt exceeded Puerto Rico’s debt limit found in Puerto Rico’s constitution. The proper solution, it argued, was to declare the bonds invalid.

On Wednesday Swain said she was inclined to approve a procedural order proposed by the Puerto Rico Oversight Board and Unsecured Creditors Committee. She said would seek proposed revisions to a procedural order before she approved a final order.

In a related development, Swain is near the end of a process to restructure the Puerto Rico Sales Tax Financing Corp. (COFINA) bonds. In the last few months some holders of the COFINA subordinate bonds have come forward to complain that, when a restructuring deal was developed, they were not contacted to participate.

One of those COFINA subordinate holders, Peter Hein, appeared before Swain Wednesday as a holder of GO bonds saying that she should appoint a committee to represent the retail bondholders on the matter at hand. The committee could then hire an attorney to represent their interests.

In response, Unsecured Creditor Committee attorney Luc Despins told Swain that she had ruled earlier in the Title III process that there wouldn’t be a committee set up for individual bondholders. Despins said that the GO holders are already adequately represented.

Attorney Mark Stancil represented the Ad Hoc Group of GO Bondholders at the hearing. Mark Ellenberg represented Assured Guaranty, which insures Puerto Rico GO bonds.

The proposed order, among other things, states that holders of GO bonds would have to file a notice of participation with the court in order to participate in the further legal development of the controversy. Holders of large blocks of GO bonds would be given 35 days after the entry of the procedural order to file the notice of participation. Holders of smaller sized chunks would be given 50 days.

Holders who wished to join the legal process after these deadlines could do so but would be bound by the court’s order on the litigation’s conduct.

Within 30 days after the passage of the participation deadline, the board and the UCC would file with the court “a notice setting forth the names of all participants, identifying which are [attempting to nullify the GO bonds and which are arguing against this], a summary of the participants’ grounds for supporting or objecting to the relief sought in the objection, a proposal as to which issues raised by participants can be subject to joint briefing, and a proposed briefing and discovery schedule.”

At Wednesday’s hearing Despins said that all GO holders potentially affected by the nullification would be notified by Prime Clerk and given an opportunity to respond. Swain asked for the notification language to be improved.

At Wednesday’s hearing Swain took no action on the proposed COFINA plan of adjustment.

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PROMESA Bankruptcy Commonwealth of Puerto Rico Puerto Rico Sales Tax Financing Corp (COFINA) Puerto Rico Infrastructure Financial Authority Puerto Rico Industrial Development Co Puerto Rico