Puerto Rico’s unsecured creditors work to scuttle GDB deal

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The Unsecured Creditors Committee in Puerto Rico is trying to gain standing in the Government Development Bank restructuring case, the group's latest bid to alter or scuttle the consensual deal among bondholders.

The unsecured creditors will present their arguments in a hearing with Puerto Rico bankruptcy Judge Laura Taylor Swain at 2 p.m. on Wednesday in the Federal District Court in New York City.

The GDB deal was reached through Title VI of the Puerto Rico Oversight, Management, and Economic Stability Act, which covers negotiated debt restructurings. The deal affects about $4.1 billion of debt. Among other terms, the GDB’s proposed restructuring would require the exchange of existing bonds for new bonds with par values 45% lower.

If Swain grants the unsecured creditors standing, then there is a good chance they will be able to scuttle the GDB deal, said Puerto Rico attorney John Mudd, who represents a municipality in the Puerto Rico central government’s bankruptcy.

On Sept. 18 Swain rejected the group's claim that the GDB deal violated an automatic stay authorized by PROMESA. Late on Tuesday the unsecured creditors filed a notice in the Puerto Rico bankruptcy case that it had filed an appeal of that ruling in the First Circuit Court of Appeals.

In her ruling, Swain said the committee met the “basic requirements of constitutional standing.” though she added it wasn’t clear if it met other requirements for standing. She then decided not to rule on the topic and instead rule on the “merits of the motion.”

The Unsecured Creditors Committee represents non bond-holding creditors in Puerto Rico.

If the GDB deal was scuttled then restructuring of the GDB’s debt would likely go into PROMESA’s Title III bankruptcy process, Mudd said. Even if Swain rules against the unsecured creditors, the unsecured creditors may appeal the issue successfully and ultimately push the GDB deal to Title III.

PROMESA’s Title III is a more traditional bankruptcy mechanism, with the Puerto Rico Oversight Board and the judge being the most active players.

In a filing with Swain on Friday the Unsecured Creditors Committee wrote, “If the committee is denied standing and the GDB restructuring is approved, it will long be remembered as a notorious case in which, right under everyone’s noses, an insolvent entity was unlawfully liquidated pursuant to a territory law [i.e. the GDB Restructuring Act] , all of its most valuable assets were used to pay a favored subset of unsecured creditors, rights and claims of potentially enormous value were released without any prior investigation, disfavored creditors were rendered powerless to do anything about it, and the parties ultimately harmed were not allowed to come forward and be heard.”

The unsecured creditors have asked to be given the right to not only represent themselves in the GDB bankruptcy but also to represent the Title III debtors who had deposits at the GDB.

The unsecured creditors say that the Oversight Board has a conflict of interest in its role representing the GDB, Puerto Rico’s central government, and the Title III debtors (for example, the Puerto Rico Electric Power Authority). The conflict of interest stems in part from the fact that some of the board’s members used to work for the GDB and the deal, the committee claims, would give them immunity for their actions.

On Friday the unsecured creditors wrote in their court filing, “The committee is not aware of a single chapter 9 [municipal bankruptcy] case involving inter-debtor claims between affiliated governmental entities, much less a case holding that such claims can be litigated and/or resolved without representation by independent fiduciaries. The situation confronting this court is simply unprecedented.”

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PROMESA Government Development Bank for Puerto Rico Commonwealth of Puerto Rico Puerto Rico Electric Power Authority Puerto Rico