Puerto Rico board asks court to reject debt proposal deadlines

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The Puerto Rico Oversight Board on Tuesday asked the bankruptcy court to reject a bondholder proposal for the court to impose deadlines on the board’s introduction of a plan of adjustment.

Also on Tuesday afternoon Puerto Rico’s Fiscal Agency and Financial Advisory Authority, which represents the opinion of the local government in the bankruptcy, and bond insurer Ambac Assurance submitted objections to the bondholder proposal.

Martin Bienenstock
Puerto Rico Oversight Board attorney Martin Bienenstock said bondholders, with their deadline proposal, are just trying to pressure the board to accept their proposals.

Four groups of investment funds holding Puerto Rico bonds filed the original joint motion on Oct. 6 in the U.S. District Court for Puerto Rico, which is handling the bankruptcy.

They asked the court to require the board to do one of three things by Nov. 30: Affirm that it will try to finalize the existing proposed plan of adjustment announced in February, file a modified version of the existing plan with a modified disclosure statement, or file a new proposed plan of adjustment and disclosure statement. They also asked the court to set other dates, including a requirement that a plan be approved no later than June 30.

In the board’s Tuesday filing, board lead attorney Martin Bienenstock and two others said there are three possible paths for the Title III bankruptcies. One is that the board revises the current proposed debt restructuring in light of the impact of the COVID-19 pandemic on revenues and the failure of the Puerto Rico government to institute structural changes. Another is for the board to try to get court approval of the current plan of adjustment — but since this isn’t feasible for Puerto Rico’s economy and society this isn’t a “viable” option. Third, the court could dismiss the Title III cases, leaving the creditors to legally force the payment of all their Puerto Rico central government-guaranteed debt, which would be disastrous, they said.

“Imposing an arbitrary plan confirmation timeline or dismissing these Title III cases at this time will only harm the commonwealth and its people,” the board told the court. “The motion should be seen for what it is — a negotiation tactic to put pressure on the Oversight Board in an effort to extract further concessions. The Oversight Board should not be put in a position where it is forced to negotiate under unnecessary duress or in a manner inconsistent with the mandates set forth in [the Puerto Rico Oversight, Management, and Economic Stability Act].”

On the investment fund filing and board counter-filing, Puerto Rico attorney John Mudd said, “This is a negotiation tactic by bondholders to get the plan of adjustment going forward. On the other hand, the board is essentially admitting there will be a new plan of adjustment. But it may lack support since it is obvious bondholders do not want to accept further haircuts."

The board said it has made progress in restructuring Puerto Rico’s debts. Among other things it points to are the restructuring of the Puerto Rico Sales Tax Financing Corp. (COFINA) debt and the outcomes on stay litigation on $7 billion of claims from creditors of the Highways and Transportation Authority, Infrastructure and Finance Authority, and Convention Center District Authority. The outcome of these claims litigation “safeguarded the commonwealth’s billions of revenues the [investment fund] creditors count on to pay GO debt.”

The investment funds had cited In re New York City Off-Track Betting Corp. to support their request for deadlines to be put on the case. The board said the case is “inapposite,” partly because in it, it was the debtor that asked for dismissal of the case. In this case the creditors are asking for dismissal.

The board quoted the bankruptcy court’s earlier statement that PROMESA “provides substantial deference to the strategy and tactics of the Oversight Board.”

For these and other reasons the board asked the court to reject the investment funds’ motion to impose deadlines.

In its filing FAFAA repeated some of the points the board had made. It also said that the board’s changed projection for Puerto Rico’s economy in the aftermath of COVID-19 stemmed from changes to the federal government’s projections for the U.S. economy following the pandemic. Since Puerto Rico’s economy is highly dependent on the U.S. economy, lowered projections for the latter must be assumed to lower projections for the former.

According to Ambac, the current amended debt proposal (Plan Support Agreement) is “patently unconfirmable.” One of the reasons for this is that it treats pensioners better than revenue bondholders.

Ambac also said the hedge funds’ proposed schedule is much too rapid to fairly and effectively deal with expected issues.

In Ambac’s words, “The court has not issued a ruling on the merits regarding what rights Ambac and other revenue bond creditors have in the revenue streams pledged to secure bonds issued by Puerto Rico Highways and Transportation Authority, Puerto Rico Infrastructure and Finance Authority, and Puerto Rico Convention Center District Authority. The court’s preliminary findings in connection with the monolines’s lift-stay motions do not resolve the questions on the merits.

“And those preliminary findings on the HTA and PRIFA lift-stay motions are on appeal in any event, and the parties clearly would benefit from the First Circuit [Court’s] guidance before moving forward with a costly and time-consuming solicitation process.”

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Puerto Rico Commonwealth of Puerto Rico Puerto Rico Highway & Transportation Authority Puerto Rico Infrastructure Financial Authority Puerto Rico Sales Tax Financing Corp (COFINA) PROMESA