The Government Development Bank for Puerto Rico debt restructuring deal faces burgeoning court challenges.
Bondholders are voting on the deal until Sept. 12 and Puerto Rico’s government has indicated confidence that many support the deal.
But 13 parties have filed either court challenges or notices of intent to challenge the deal since Puerto Rico formally filed the deal in court on Aug. 10.
Bondholder votes will be divided into those who hold Puerto Rico guaranteed GDB bonds and those who hold GDB bonds without the guarantee. For the deal to pass, in each bond class holders of at least a majority of the par value outstanding must vote in favor and holders of at least two-thirds of the par value voted on must vote in favor.
The GDB and the Puerto Rico Fiscal Agency and Financial Advisory Authority filed the proposed restructuring in the United Stated District Court for the Puerto Rico District. Judge Laura Taylor Swain is hearing the case. She is also handling the Puerto Rico entities in Title III bankruptcy.
Unlike those other entities, the GDB deal is operating under Title VI of the Puerto Rico Oversight, Management and Economic Stability Act. This PROMESA section oversees negotiated deals on which creditors ultimately vote.
The GDB has about $4.2 billion in bond debt outstanding.
Among the parties filing objections or intentions to object are the United States government, the Official Committee of Unsecured Creditors, bond insurer National Public Finance Guarantee, and Siemens Transportation Partnership Puerto Rico.
The U.S. government says that since the proposed order hasn’t yet been presented, it filed a motion to preserve its rights over its deposits at the GDB.
NPFG filed out of a concern about how the GDB handled a $15 million trust fund. It also filed a separate motion to “reserve rights” because it insures Puerto Rico Electric Power Authority bonds. The authority has $114 million on deposit at the GDB that the deal would affect, NPFG stated.
Several of the other filings are notices of intent to object and don’t specify the nature of their complaint.
The Unsecured Creditors Committee made at least 10 legal challenges to the GDB debt deal.
U.S. municipal bankruptcy expert James Spiotto said one thing that concerns the UCC and may concern Swain is that while the deal affects municipalities, they will not vote on it. The municipalities have deposits at the bank.
In the deal the amount of each municipality’s deposits at the GDB would be credited against the amount the municipality owed the bank in loans. This is called the municipal setoff. Any additional deposits remaining would be restructured at 55 cents on the dollar and treated as a bond claim.
Additionally, a special additional tax held for municipalities held at the GDB will be paid in cash at 55 cents on the dollar.
There is a question whether the GDB debt deal “affects the rights of others that should not be impaired,” Spiotto said. “The problem is that they might be using money that is not theirs to use,” said Spiotto, managing director at Chapman Strategic Advisors.
One specific issue is that cities owe money to others and those others may be affected by the GDB deal’s handling of the cities’ money, Spiotto said.
A legal matter for the court to determine will be if all parties affected by the proposed restructuring deal will have been allowed input on it, Spiotto said.
In its filing on Aug. 22 the Unsecured Creditors Committee said it was concerned that the negotiations for the GDB restructuring deal “were not conducted on an arms’-length basis because current and former GDB insiders are (i) board members of the Oversight Board, (ii) officers of [FAFAA], (iii) managing directors of [FAFAA’s] financial advisors, or (iv) the executive director of a GDB bondholder group supporting the transaction (the so-called ‘Bonistas Del Patio’).“
Among the UCC’s legal arguments against the proposed deal is that it violates requirements in PROMESA section 201(b)(1)(M) regarding asset transfers among Puerto Rico instrumentalities.
The UCC also said that “to the extent that the court determines that the Title III debtors’ [i.e. Puerto Rico government and Puerto Rico government authorities’] deposits are not held in trust or in a fiduciary capacity by GDB, then the proposed treatment of the Title III debtors’ deposits with GDB violates the statutory requirements for pools of bond claims in PROMESA.”
However, the UCC says that Puerto Rico and Puerto Rico authority cash was in fact held in trust by the GDB and didn’t belong to it. Thus the GDB has no right to confiscate it to pay certain of its creditors at the expense of Puerto Rico government entities currently in Title III bankruptcy.
While there have been many challenges filed in the Title VI case in the three weeks since it started, it remains to be seen how much flexibility Swain has to address them. PROMESA says that Swain must respect the Oversight Board-approved fiscal plan. However, it also says despite this, “there shall be a cause of action to challenge unlawful application of this section.”
“The district court shall nullify a [debt] modification and any effects on the rights of holders of bonds resulting from such modification if and only if the district court determines that such modification is manifestly inconsistent with this section [of PROMESA],” PROMESA states.
“I can’t see that the court is just a rubber stamp,” Spiotto said. He said he thought the judge will look at whether the deal treats some sorts of creditors better than others.
