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Debt Restructuring

Puerto Rico's Bondholders Battle Begins: COFINA v. GOs

On May 1, 2017 a stay over debt service payments established by the PROMESA Act, which essentially stops creditors’ lawsuits for debt defaults against Puerto Rico, will expire.

The Commonwealth is currently negotiating with creditors under Title IV of PROMESA, which relies on collective action mechanisms with creditors to restructure debt. If a consensual debt restructuring deal has not been reached by April 30th, the Oversight Board, with a supermajority vote of 5 of its members, could proceed to federal court to enter debt restructuring procedures under Title III of PROMESA. This court-sanctioned restructuring process is similar to bankruptcy procedures under Chapter 9 of the US Code (11 U.S.C.).  Otherwise, creditors will be able to sue the territory for debt service payments.

  1. Fiscal Plan

March 13, 2017- The Financial Oversight and Management Board for Puerto Rico approved a 10-year fiscal plan (FPPR) after requesting that the original plan, submitted by Gov. Ricardo Rosselló on Feb.28, be revised.  This new fiscal plan proposes payment of 22.6% to 23.7% of debt due. After approving the measure, the board directed Gov. Rosselló to submit a detailed implementation plan, a proposed fiscal 2018 budget, and a revised Puerto Rico liquidity plan by April 30.

  II.    Puerto Rico Sales Tax Financing Corporation (COFINA) Bonds Lawsuit

 General Obligation bondholders Lex Claims LLC sued the Government of Puerto Rico and have asked the federal court to declare the Emergency Moratorium Act or the stay unconstitutional. They claim that the act overlooks General Obligations bonds’  constitutional payment priority. Later, when the Government continued paying COFINA (Puerto Rico Sales Tax Financing Corporation/Corporación del Fondo de Interés Apremiante) bondholders, Lex Claims’ amended its lawsuit in an attempt to have COFINA’s structure declared null.

COFINA bondholders responded by submitting a motion before District Court Judge Francisco A. Besosa, who is presiding over the case, after he waived the automatic stay on litigations established by PROMESA. This motion argued that Puerto Rico may have issued debt illegally, since, at the time of issue, the Puerto Rican Government had already exhausted its 15% loan margin, as stipulated by the Puerto Rican Constitution. As a result, and according to COFINA’s bondholders, the issue of $3 billion in GO bonds and others could be considered null. COFINA bondholders requested the federal court dismiss Lex Claims’ lawsuit. The Financial Oversight Board moved for an interim stay of the entire district court action. In late March 20, 2017, a federal appeals court in Boston granted their request, overturning Judge Francisco Besosa’s decision.

On April 12, 2017 another lawsuit regarding COFINA was filed.  Two investment firms,  Whitebox Advisors & Pandora Select Partners, accused COFINA’s trustee, Bank of New York Mellon of conflict of interest, breach of contract, and fiduciary duty in a suit filed with the Supreme Court of the State of New York.

The Fiscal Agency and Financial Advisory Authority had previously issued a statement stating that before starting negotiations among the relevant parties, they would ask Besosa to decide on the Lex Claims controversy on or before April 30. The Oversight Board informed creditors in a letter on Thursday, March 31st, that mediation was set for April 10-13 in New York.

According to El Nuevo Día, the creditors who participated in the meetings rejected the Government’s offer (allegedly a cutback in principal that could reach 40% of the debt in General Obligations and about 50% of the debt principal). Mediation is expected to resume April 17, 2017.

 

Kathya Severino Pietri
Wednesday, April 19, 2017 - 11:00am