Puerto Rico bondholders ask court to put deadlines for board debt proposal

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Key Puerto Rico bondholders asked the court to set plan of adjustment deadlines for the Puerto Rico Oversight Board to meet.

Four groups of investment funds filed the joint motion Tuesday night in the U.S. District Court for Puerto Rico, which is handling the bankruptcy.

The litigants in Tuesday’s motion are the Lawful Constitutional Debt Coalition, the Ad Hoc Group of Constitutional Debtholders, Ad Hoc Group of General Obligation Bondholders, and the QTCB Noteholder Group. Investment and hedge funds holding Puerto Rico central government bonds are the members of these groups.

On Wednesday the board said it was reviewing the filing and would respond to it at a later point.

Judge Laura Taylor Swain
Puerto Rico bondholders have asked bankruptcy Judge Laura Taylor Swain to put deadlines on the board's progress to a central government plan of adjustment.

The groups 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.

The groups told the court to require that by Feb. 1, 2021, the court consider the adequacy of the disclosure statement.

They requested the court to require voting on the plan start by early February and tabulation of the votes be completed by April 30. They asked the court to consider confirming the plan no later than May 31.

Finally, they sought the court to order that the plan be consummated by no later than June 30.

The bondholders pointed to Section 312(b) of the Puerto Rico Oversight, Management, and Economic Stability Act that directs the court to put a deadline for the board to introduce a plan. PROMESA governs the bankruptcy.

They argued the delay in completing the central government debt deal prevents the Puerto Rico government from accessing the capital markets and that this is necessary for Puerto Rico to recover.

“Bondholders want to get paid and the plan in the [February 2020] plan support agreement and [proposed] plan of adjustment was to have the [plan of adjustment] approved by November and paid by February 2021," said Puerto Rico Attorney John Mudd. "Now it is up in the air.”

Bankruptcy Judge Laura Taylor Swain will grant the motion but may impose later dates for the plan, Mudd added.

There is no authority in PROMESA for the hedge funds to enforce their preferred deadlines on the Title III bankruptcy court and the plan support agreement is merely a contract between the board and the hedge funds, Puerto Rico commentator Cate Long said.

Since February the board has said the bondholder plan support agreement will have to be renegotiated because of the impact of the COVID-19 lockdown on the island’s economy. They have said the impact will last for several decades.

At the end of September the board released its position and the position of the four bondholder groups making Tuesday’s filing on what the revised plan support agreement should be. The two sides were far apart. The positions were depicted as of Aug. 24. According to Tuesday’s filing, the board hasn’t responded to the bondholders’ proposal since then.

The bondholders said that Puerto Rico’s government would afford to pay the debt service found in the February plan of adjustment.

They noted that in August a federal court found the island’s residents couldn’t be barred from receiving federal Supplementary Security Income, Supplemental Nutritional Assistance Program, and Low-Income Subsidy for Medicare Part D benefits. They said that one island economic think-tank calculated these benefits could have a positive economic impact of up to 7.5% of Puerto Rico’s gross national product annually.

They used this figure to counter the board’s projected government revenues over the next several decades, which they say are excessively pessimistic.

They also said they have proposed some of the new restructured bonds be given to them in “contingent value instrument[s],” which would only be paid when Puerto Rico was meeting or exceeding the May 2020 fiscal plan projections. They said this shows their reasonableness.

They asked the court to impose the deadlines on the board and, if the board avoids them, dismiss the Title III case. This would leave Puerto Rico to pay all $35 billion of central government debt according to its original terms.

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