Monday Update – September 24, 2018

Welcome to your weekly Title III update for September 24, 2018. Important things have happened this week, in and out of litigation.

On September 18, 2018, representatives of Kobre and Kim, together with Oversight Board members Arthur González, Ana Matosantos and David Skeel, presented their findings to the public, which was essentially the press. In a rehash of the report, which does not make any findings of who is responsible, Arthur González made it clear that attributing responsibility was not important to the Board. Although this was an overview of the report, a few important things came out. During the discussion, David Skeel made it clear that the purpose of the report was not to find causes of action, which is totally contrary to the representations made by the Board attorneys to Judge Swain. Also, after the presentation, a panel of “experts” (myself included) commented on the report. Most of us insisted that the Board had to assert causes of action against some, if not all, the entities mentioned in the report who may be liable to the government. One of the panelists, Alvin Velázquez, who represents a union that sits in the UCC, was adamant on this point. I, on the other hand, insisted on amendments to the Puerto Rico Constitution to prevent what has occurred in the past 50 years. Finally, Ana Matosantos, during the presentation and during the press conference, stated that the Board was going to take a look at the $3.5 billion 2014 GO issue. I would not be surprised to see the Board suing to declare it illegally issued, which would make it an unsecured, non-priority claim. In any event, I doubt the Board will exercise all the options it may have and will leave little time for the UCC to deal with them before May 2019. This is especially important for the unsecured creditors who are seeing the pot shrink with all the deals being made with bondholders.

Judge Swain denied the UCC’s claim that the GDB restructuring violated the automatic stay. The Court seemed to find that the UCC had standing but—in clear violation of First Circuit precedent (standing goes to the Court’s jurisdiction, hence must be dealt with first)—abandoned the complete discussion on the issue and went to the merits of the claim, essentially dismissing all arguments. The Court determined:

Respectively, these provisions preserve the authority of territories to exercise “political or governmental powers,” 48 U.S.C. § 2163, provide that the provisions of Title III do not prevent holders of claims from consenting to modifications under Title VI, 48 U.S.C. § 2164(i), and prohibit the Court from interfering with Title III debtors’ property and political or governmental powers, 48 U.S.C. § 2165. Here, the Oversight Board, acting pursuant to its powers under PROMESA (which include review of Commonwealth legislation, certification of Title VI restructurings, and representation of the Title III debtors), has consented, by virtue of its certification of the Restructuring Support Agreement, to the GDB Restructuring. The Commonwealth’s legislature considered and enacted the GDB Restructuring Act, which creates new entities, authorizes asset transfers, and curtails certain causes of action of the Commonwealth and the instrumentality debtors. The GDB Restructuring, although subject to Court approval, is a vehicle to effectuate a transaction by, not against, the Debtors and is not subject to the strictures of the automatic stay. Thus, the Committee’s argument that Section 362(a) precludes the GDB Restructuring absent relief from the automatic stay fails on its merits.

The Judge also dispatched what I thought was the UCC’s strongest argument:

The Committee’s argument that the debtor-representation responsibilities that Congress placed on the Oversight Board create conflicts of interest, and that historical ties of the Oversight Board members, and other personnel involved with the restructuring, with certain institutions exacerbate such conflicts, is immaterial to the issue of the statutory reach of the automatic stay and thus will not be further addressed here.

Clearly the Court is not saying it will not consider these arguments in the GDB restructuring case, which is not part of the Title III proceedings, but it does not abode well for the argument. The issue of standing is crucial to the UCC since both the Board and the GDB have filed motions to dismiss its adversary proceedings essentially based on the issue of standing. I would not be surprised if Judge Swain denies the UCC standing, which would also doom its objection to the GDB restructuring, since it relies heavily on the Board’s real conflicts of interest.

Other creditors have filed objections to the GDB restructuring. The Rafael Hernández Colón and Sila Calderón foundations filed objections claiming that the GDB has money assigned to them. Also, two sureties, Fidelity and Deposit Company of Maryland and Zurich American Insurance Company filed objections stating that their claims are ignored in the Qualifying Modification and they will not be resolved in this manner. No idea what the Court will do with that.

In addition, National Public Finance Guarantee Corporation, Ambac Assurance Corporation, Assured Guaranty Corp. and Assured Guaranty Municipal Corp., requested leave to file their objections by September 25, 2018. It is even possible they are negotiating with the Board to get some change to the Qualifying Modification. We will know more on during the October 3 Hearing.

These objections are important for the Board so it notified the Court about the GDB bondholders’ votes:

Eligible Voters of over 74.8% of the aggregate principal amount of the Participating Bond Claims in the GDB Bond Claims Pool voted, and that, of those that voted in such pool, over 97.4% of the Participating Bond Claims voted to approve the Qualifying Modification, reflecting over 72.9% of the aggregate principal amount. In addition, 100% of the aggregate principal amount of the Participating Bond Claims in the Guaranteed Bond Claims Pool voted to approve the Qualifying Modification.

In the Commonwealth case, both AAFAF and the Board opposed the UCC’s request to be given derivative standing to represent all Title III debtors in the GDB restructuring based on the clear conflicts of interest they have. This will also be discussed on October 3, but I doubt Judge Swain will disqualify the Board on this issue.

Also of great importance is the announcement by the Board of an Amended COFINA Plan Support Agreement. The Amended agreement includes the Puerto Rico Government, COFINA, the monoline insurers, Senior and Junior ad hoc groups, Bonistas del Patio, Aurelius Capital Master Ltd and Six PRC Investments, LLC.—both  holders of GO bonds. Hence, the COFINA deal has the blessing of the GO bondholders, which means they are either willing to take cuts on their bonds or the Board has made them an offer they can’t refuse. This idea is bolstered by the fact that Aurelius and Six will dismiss their claims in the Lex Claims litigation. Finally, Seniors retain their 93% payment and Juniors 56.399%. Also, all the parties to the settlement agree that even if the Aurelius Constitutional challenge to the Board appointment is successful, this agreement will be valid.

Since COFINA makes up about 24% of the debt, this settlement is of great importance to the Board and AAFAF. Unless the Junior bondholders object to the distribution, the only thing that could prevent its approval is the warning of the UCC that the numbers in the June Commonwealth Fiscal Plan are not enough to pay COFINA. Since the Board will certify a new Fiscal Plan by September 30, it is possible that even that objection may be withdrawn.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.

Monday Update – September 17, 2018

Welcome to your weekly Title III update for September 17, 2018. Very little happened this week.

On Wednesday, September 13, Judge Swain held the Omnibus hearing. Apart from reports by the Board and AAFAF, the hearing focused on the UCC”s motion asking for a declaration that the GDB agreement and settlement law violated the automatic stay.

The Board began by announcing that the settlement in the Title III of the Commonwealth and the Disclosure statement for COFINA would be filed on or before October 15, and that it expected to wind up the Plan of Adjustment by December 2018. Ambitious timetable indeed.

The Board also mentioned that on Tuesday, September 18, there would be a discussion on the Investigator’s report. The Board mentioned that it will be concentrating on the causes of action that will bring value to the bankruptcy, rather than prioritizing one debtor over another. Judge Swain brought up the issue of recommendations for criminal prosecution, which the Board picked up, although obviously the federal and local Department of Justices can deal with this. The Judge also wanted to know if the Board knew more than the Kobre report states. The answer was not clear.

As to Investigator’s report, I must advise that the Board has invited me to be part of a panel to discuss the policy recommendations of the Report. I accepted and will then report what happened.

As to PREPA, the Board reported that it does not need any new financing and it continues to discuss a settlement with its insured bondholders. The Board also informed there was significant interest in the purchase of generation and that the P3 agency had retained counsel (that’s all we need, more ultra-expensive U.S. counsel).

The Board boasted that with the agreements to date, it was close to restructuring 40% of the bond debt (COFINA $17.6, PREPA $8.3 and GDB $4 billion). Mr. Bienestock then intimated that the Board was discussing a settlement with the GO’s and that their value was $18 billion plus $5 billion extra for pledges (presumably PBA bonds). Not only is this a significantly larger amount than originally thought, but if the Board gets to an agreement similar to the previous one, that would mean $53 billion of the $72 billion in bond debt. If done this year and all else goes according to plan, the Title III cases could be wound up by 2020. Not bad,

The UCC renewed their fear that the COFINA deal cannot go through with the present Commonwealth Fiscal Plan. AAFAF, Bettina Whyte, and the Senior COFINA bondholders, however, countered saying the agreement was not based on any of the fiscal plans. More on this latter. The Retiree’s Committee joined in and said COFINA was now unaffordable and if it goes through, there will not be enough money to fund services and pensions.

The Board reported that the Commonwealth, COFINA, and UPR Fiscal Plans would be done by the end of the month and the remaining plans would be done by October. I assume we will know more on the Committee’s objections at that time.

AAFAF reported that the GDB deal was voted by 70% of those eligible and that 95% were in agreement. Also, it reported that 26 of the 30 municipalities with excess CAE were on board with the deal.

Judge Swain informed AAFAF that it wanted to know exactly what she has been asked to approve and what she was not been asked to approve.

Mr. Bienestock stated that the Board believed that the GDB agreement was a good thing for the Title III debtor, the Municipalities, and the GDB and that the restructuring was consistent with PROMESA.

When it came to the UCC to argue its objections, one thing was clear: Judge Swain is not buying. From her questions she is not sure the UCC has standing to object to the agreement and she believes that the Government of Puerto Rico can decide to give all the releases and accept the settlements—especially when the Board agrees. It is likely Judge Swain will deny the UCC any standing, which will also mean the dismissal of its Adversary Proceeding to stop the GDB deal. If this happens, it is more likely than not that the UCC will appeal. More uncertainty.

Finally, Minority Leader Pelosi said last week that the decision of selling PREPA should be left to Puerto Rico, which I am afraid will mean no sale at all. Wonder what Mr. Walker at the DOE thinks about this.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.

Monday Update – September 10, 2018

Welcome to your weekly Title III update for September 10, 2018. Important things came about in the case, almost all related to the UCC.

The UCC came out swinging in its reply to the Board and AAFAF’s opposition to their stay motion. It argued:

As discussed below, the GDB Restructuring does not involve the exercise of the “governmental and political powers” reserved to the Commonwealth under section 303 or protected from Court interference under section 305. Moreover, it is impossible for an order enforcing the automatic stay to “interfere” within the meaning of section 305 of PROMESA because such an order merely recognizes the application of a stay that is already in force, having arisen either “automatically” by act of Congress or consensually by prior order of this Court (in the case of the Stay Order).

The Oversight Board’s remaining arguments also fail. Contrary to the Oversight Board’s assertion that the Title III Debtors consented to the GDB Restructuring, the Title III Debtors cannot consent to annul the automatic stay. Further, the Oversight Board’s assertion that the Title III Debtors lack net claims against GDB is irrelevant, unsupported, and shows only that the Oversight Board is hopelessly conflicted and uninterested in acting as a true fiduciary for the Title III Debtors. . .

Debtors cannot consent to annul the automatic stay. Further, the Oversight Board’s assertion that the Title III Debtors lack net claims against GDB is irrelevant, unsupported, and shows only that the Oversight Board is hopelessly conflicted and uninterested in acting as a true fiduciary for the Title III Debtors. (Bold added)

The motion does not stop there. It claims:

More fundamentally, the actions taken by GDB pursuant to the GDB Restructuring consist of more than just the use, sale, or lease of property as described in section 363; they are actions specifically designed to enforce the GDB’s claims against the Title III Debtors and to disallow the claims of the Title III Debtors against the GDB, including by handing out releases to the GDB Releasees.

At the end of the motion, the UCC further abounds on the issue of the Oversight Board’s fiduciary duty:

Indeed, the Oversight Board’s premature conclusion that the Title III Debtors have no net claims against the GDB is profoundly troubling given the Oversight Board’s role in the Title III cases. The Oversight Board is the Title III Debtors’ trustee and representative, a fiduciary charged with maximizing the Title III Debtors’ assets. Yet, without any analysis, it is eager to abandon potential claims against GDB in order to facilitate the GDB Restructuring.

This is particularly troubling given that the Oversight Board’s own investigator has produced a report that discusses, among other things, how GDB officials directed the Commonwealth to borrow additional debt even as they were plotting for a restructuring by hiring restructuring counsel and restructuring financial advisors before the issuance of the $3.5 billion GO bond offering in March 2014 (which they failed to disclose to the general market). These same GDB officials controlled the 2014 GO offering, as they did for all of the Puerto Rico bond offerings, utilizing proceeds of such offering to repay the GDB, so that GDB and its directors and officers would be off the hook from any liability—all of this at a time when both the Commonwealth and the GDB appeared to be at least undercapitalized, if not insolvent.

Want more? At footnote 68, the UCC says:

The Oversight Board has argued elsewhere that section 315(b) of PROMESA simply makes the Oversight Board the representative of the Debtor in a title III but does not make the Oversight Board a fiduciary. See Motion of the Financial Oversight and Management Board for Puerto Rico to Dismiss Plaintiffs’ First Amended Adversary Complaint Pursuant to Fed R. Civ. P. 12(B)(1) and 12(B)(6), at 30 n. 15, Pinto Lugo v. United States [Docket No. 36 in Adv Proc. No. 18-041-LTS]. The Supreme Court has recognized that a “trustee for a debtor out of possession” owes fiduciary obligations to creditors and shareholders.

This motion is not all the news. The UCC also filed an Informative Motion Regarding the Investigator’s Final Report, essentially saying the investigator’s work is not up to par. At the conclusion, the UCC states:

The Committee wishes to reiterate that it is not dismissive of the work performed by the Investigator. Moreover, the Committee continues to study the Final Report, and, while attempting to minimize costs, will likely file another motion (or amend the Committee’s prior Rule 2004 Motion) to the extent necessary to do so to cover areas of inquiry that were either completely ignored or partially covered by the Final Report. However, the Committee makes this filing only to highlight for the Court and the various parties that the Final Report is not the end of the matter, that its findings remain subject to question, and that—as the Final Report acknowledges—much more work remains necessary to obtain full transparency in these Title III cases.

On Thursday, September 6, 2018, the UCC filed an adversary proceeding against the Commonwealth, AAFAF, the GDB and the Board seeking to stop the bank’s Title VI proceeding. The complaint states:

As a result of the fiscal crisis, GDB was operationally wound down and ceased operations more than a year ago, but former GDB insiders remain involved in all aspects of Puerto Rico’s restructuring efforts. Indeed, current and former GDB insiders are now (i) members of the Oversight and Management Board for Puerto Rico (the “Oversight Board”), (ii) officers of the Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”), (iii) managing directors of AAFAF’s financial advisor, or (iv) the executive director of a GDB bondholder group supporting the transaction (the so-called “Bonistas Del Patio”).

These individuals would prefer that this Court “bury” GDB before the Committee and other interested parties have the opportunity to perform the autopsy. To that end, they are attempting to do what PROMESA does not allow—restructure all of GDB’s debts and liquidate all of its assets outside of Title III pursuant to a “home-baked” chapter 7 equivalent known as the Government Development Bank of Puerto Rico Debt Restructuring Act (the “GDB Restructuring Act”), which was enacted specifically to effectuate the restructuring of GDB and all related transactions (collectively, the “GDB Restructuring”).

The complaint’s requests for relief are:

  • On the First Cause of Action, declaring that the GDB Restructuring Act is invalid and unenforceable because it amounts to a de facto bankruptcy law that is inconsistent with Title III of PROMESA;
  • On the Second Cause of Action, declaring that the GDB Restructuring Act is inconsistent with Section 601(m)(2) of PROMESA and therefore preempted pursuant to Section 4 of PROMESA insofar as it purports to release rights and claims of the Title III Debtors unrelated to any Bond affected by the purported Qualifying Modification, including any claims against the GDB Releasees;
  • On the Third Cause of Action, declaring that the GDB Restructuring Act is inconsistent with the automatic stay and therefore invalid and unenforceable in accordance with Section 4 of PROMESA insofar as it purports to release the Title III Debtors’ rights and claims against the GDB Releasees;
  • On the Fourth Cause of Action, declaring that the GDB Restructuring Act is inconsistent with PROMESA and therefore invalid and unenforceable in accordance with Section 4 of PROMESA insofar as it would deprive creditors of the Title III Debtors of their right under Section 926(a) of Bankruptcy Code to seek appointment of a trustee to pursue Avoidance Claims;
  • On the Fifth Cause of Action, declaring that the GDB Restructuring Act is inconsistent with PROMESA Section 601(n)(2) and therefore invalid and unenforceable in accordance with Section 4 of PROMESA insofar as it purports to deprive the Title III Debtors of standing they would otherwise have under PROMESA to challenge the unlawful application of Title VI;
  • On the Sixth Cause of Action, declaring that the GDB Restructuring Act is invalid and unenforceable insofar it purports to deprive the Title III Debtors of standing they would otherwise have in federal court;
  • On the Seventh Cause of Action, declaring that the GDB Restructuring Act is inconsistent with PROMESA and therefore invalid and unenforceable in accordance with Section 4 of PROMESA because a core purpose of the GDB Restructuring is to ensure compliance with a Fiscal Plan that is not in compliance with PROMESA Section 201(b)(1)(M).
  • On the Eighth Cause of Action, that the GDB Restructuring Act is invalid and unenforceable insofar as it violates Section 303 of PROMESA;

As if this were not enough, the UCC filed a motion to be appointed the representative of the Title III debtors, claiming, with good reason, conflicts of interest in AAFAF, the Board, the GDB and GDB Bondholders (i.e. Bonistas del Patio). The UCC requests from the Court the following:

This Court should exercise its broad equitable powers and grant the Committee derivative standing to act on behalf of the Title III Debtors with respect to the GDB Restructuring for the limited purpose of maintaining the status quo and preserving their rights and claims. This Court should also confirm that, in addition to having derivative standing to act on behalf of the Title III Debtors, the Committee separately has the ability to appear in the Title VI case for the limited purpose of arguing that it has direct standing to be heard in that case on behalf of the Title III Debtors’ unsecured creditors.

The motion minces no words in describing the different conflicts of interest involved in the GDB restructuring:

GDB and AAFAF share the same officers, several of whom were GDB officers prior to the creation of AAFAF in 2016. GDB and AAFAF also share the same counsel, and the same financial and restructuring advisor.

Among the financial advisor personnel advising GDB and AAFAF are (i) a senior managing director who was president of GDB from 2011 to 2012 and Senior Vice President and Director of Investment Banking at Santander Securities Corporation, which advised GDB on numerous government debt offerings, and (ii) a senior managing director who was Executive Vice President-Financing and Treasury of GDB from 2009 to 2011 and then CEO and vice chairman of Santander Securities LLC. The financial advisor engagement team also includes a managing director who served as a senior vice president and special advisor to the president of GDB from 2013 to 2016. All would get a release for their prior GDB role pursuant to the GDB Restructuring.

Furthermore, at the time the GDB Restructuring was being orchestrated, the executive director of AAFAF was a former vice president of investment banking at Santander Securities LLC, which acted as an underwriter in numerous Puerto Rico debt offerings, all of which were controlled by GDB.

The Oversight Board, which certified the relevant terms of the RSA as a “Qualifying Modification,” is also conflicted, as is its counsel. The Oversight Board is conflicted because two of its members are former GDB presidents (who both would get a release pursuant to the GDB Restructuring) and because it is the statutory representative of the Title III Debtors. And counsel to the Oversight Board was engaged by GDB starting in January 2014 “to provide specialized legal services with respect to the evaluation of potential liability management transactions as may be requested by the [GDB].” These “liability management transactions” (i.e., restructuring and/or bankruptcy services) included drafting the Puerto Rico Corporation Debt Enforcement and Recovery Act30—the Commonwealth bankruptcy statute that was ultimately struck down by the U.S. Supreme Court. Such engagement, which was signed prior to the Commonwealth’s $3.5 billion general obligation bond offering in 2014, was never disclosed to the general market.

Even the GDB Bondholders that are signatories of the RSA are tainted by conflict. The executive director of Bonistas del Patio (the bondholder advocacy group that represented bondholders in the restructuring negotiations) was president of GDB from 2007 to 2008, and therefore would be getting a release pursuant to the GDB Restructuring. He was also an executive director at Morgan Stanley, which played an instrumental role several Puerto Rico bond offerings with which he was directly involved. Moreover, the board of directors of the Corporacion Publica para Supervision y Seguro de Cooperativas (“COSSEC”), which regulates and supervises the Cooperatives, authorized and encouraged them to buy GDB bonds in 2009 and then authorized them to buy more in 2012. COSSEC’s board of directors includes representatives of GDB and previously included two of the former GDB officers who have been advising GDB and AAFAF as financial advisors.

If the purported Qualifying Modification is approved, the very people who orchestrated the GDB Restructuring will have succeeded in releasing themselves, GDB, and others of any liability to the Title III Debtors relating to GDB’s role in Puerto Rico’s financial crisis, including any liability based on “unknown” facts. (Bold in the original)

Finally, the UCC and Bettina Whyte filed a motion requesting an extension until October 3 for holding in abeyance any motions on their case on COFINA. The UCC mentions its motion where it states that the numbers in the Commonwealth Fiscal Plan cannot cover COFINA payments. However,given that a new Fiscal Plan will be certified in September, it is willing to wait. The question is what happens if the new Fiscal Plan does not pass the UCC’s muster?

Paraphrasing Walter Donovan in Indiana Jones and the Last Crusade, “the UCC has declared war on AAFAF and the Board.” I don’t know what Judge Swain will think or do about these motions but they are important and the factual allegations are well supported.

We will probably know more on September 13 during the Omnibus hearing—although I am sure Judge Swain will want a full briefing before the oral arguments, which may delay the Title VI procedure. During the hearing, Judge Swain will hear arguments on the UCC’s motion on the stay request on the Title VI, which is opposed both by AAFAF and the Board. Her decision may give us some idea of which way she leans, or not. Stay tuned.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.

Weekly Update – September 4, 2018

Welcome to your weekly Title III update for September 4, 2018. Important things came about inside and outside the cases.

I will start with the cases before the First Circuit Court of Appeals. In case 18-1214, where Congressman Bishop filed a brief of amicus curiae, Congressman Grijalva and Congresswoman Velázquez filed their own brief of amicus curiae, essentially denying all of Chairman Bishop’s statements and saying that Congress wanted Puerto Rico to file for Title III. Sounds as if the brief had been written by Antonio Weiss of the Obama Treasury. Oh, well.

Previously, I had mentioned an oral argument in the Aurelius case for September 10, but I was mistaken. There is no date for the oral argument, but Aurelius filed its brief that the Board has until September 21 to file its own and October 5 for a reply. The Court is not inclined to give extensions. I assume oral argument will be sometime in October/November and a decision by December/January, which gives time for a writ of certiorari to the Supreme Court and a decision by June 30, 2019. Or not. We shall see what happens.

Speaking of the Aurelius case, the Popular Democratic Party filed a brief of amicus curiae in that case arguing that Judge Swain’s opinion is incorrect inasmuch as “Congress renounced the power to annul the laws of Puerto Rico (brief at page 12).” This is nothing more than the old Luis Muñoz Marín theory of the ELA as a consensual pact that cannot be changed unilaterally, discredited by PROMESA. The PDP did not ask to intervene in the Aurelius case nor filed this brief there. It is hoping against hope for some favorable statement by the First Circuit (or the SCOTUS) in favor of its theory. The problem with the theory is that if Congress cannot annul the laws of Puerto Rico, then Title I and Title II of PROMESA are invalid and then pursuant to section 3(a) of PROMESA, Title III would be deemed invalid. Small problem. In any event, this is simply another intrusion of the Byzantine party politics of Puerto Rico in a case.

In response to the UCC’s motion as to the GDB brought reaction from both AAFAF and the Board. Both motions are very similar and claim that the UCC cannot challenge the Governmental and Political Judgments about the use of their property, specifying that (1) The Title III debtors do not have a net positive claim against the GDB, (2) That the UCC does have not authority to Object to the GDB restructuring,  (3) That the UCC lacks standing; (4) That the automatic stay does not apply to the Title VI case; and (5) That sections 303 and 305 of PROMESA protects the Title VI restructuring. The Board, at page 10-11 of its brief states:

The UCC does not represent GDB creditors because GDB is not a Title III debtor. To attempt to get a seat in the GDB Title VI case, the UCC contends the GDB restructuring eliminates the Debtors’ claims against GDB and its current and former insiders. Motion ¶ 19. As shown above, the Debtors do not have net positive claims against GDB in the first place. But even if they did, it is beyond credulity that the Commonwealth, HTA, and PREPA can have meritorious claims against the governmental entity that loaned them money and kept them afloat at the request of the Puerto Rico government. But, even if they do, in the absence of the applicability of Bankruptcy Code § 363, and in light of PROMESA § 303’s protection of governmental and political powers over GDB’s assets and revenues, the Commonwealth and other Title III debtors are entitled to use their property to facilitate repayment of bondholders in their discretion. (Bold added)

Therein lies the conundrum. Two members of the Board are former Presidents of the GDB and one of them issued large amounts of COFINA debt, which is still outstanding. And they both worked at Santander Securities who helped to issue said bonds. If they violated any fiduciary duty, it would be unseemly for the Board to pursue this theory or allow for it to be pursued. Hence, it wants to shut down any possibility of a cause of action by the Government against the GDB, even if the Kobre and Kim report intimates that the GDB acted negligently.

Separate from the UCC objections and AAFAF and the Board’s opposition to said objections, last week the Municipality of San Juan filed a notice of intent to object to the GDB restructuring. In the objection, the Municipality states:

First, San Juan enjoys a lien over the monies held in trust by GDB pursuant to P.R. Act 64-1996 and the Trust Agreement between San Juan and GDB, yet San Juan is not being provided a separate voting pool, as required by PROMESA. See San Juan v. GDB, et al., Case No. 3:17-cv-2009-LTS-JGD (D. PR.), ECF No. 109, at 38-39.

Second, while PROMESA provides the sole and exclusive means for the GDB to effectuate a restructuring of its assets and liabilities, the GDB is nonetheless relying upon P.R. Act 109-2017, as amended, to effectuate a restructuring of San Juan’s Excess CAE trust funds.

This brings us to another mystery. The Board in its opposition included a GDB RSA of over 130 pages but the Municipality of San Juan’s motion makes reference to a 42 page RSA. Which is the correct one? Only the Board knows.

Talking about RSA’s, the one for COFINA is out and it is well over 100 pages. The agreement includes the Board, COFINA, AAFAF, Senior COFINA holders of bond claims, Ambac, National, Junior COFINA holders of bond claims, Assured and Bonistas del Patio.  With AAFAF involved, it means that the Commonwealth is in agreement. The document also mentions that it is the result of participating in the mediation process. “In the event that any disputes arise in connection with the preparation of the Plan and Disclosure Statement, each of the Parties consent to such matters being referred to mediation for the resolution thereof; provided, however, that no Party is limited to having any such dispute finally determined by mediation.” In other words, mediate first and if you don’t like the result, then go to Judge Swain.

The RSA states that the Disclosure statement (required by the Plan of Adjustment) in COFINA and the settlement documents in the Commonwealth Title III case will be filed on or before October 15, 2018, which means that by early 2019 the Plan of Adjustment may be approved.

As to the Covenants (duties) of Bonistas del Patio, a local group purportedly representing only locals, must:

Bonistas shall (i) actively encourage support by “on island” bondholders for the agreement set forth in the Term Sheet, (ii) post a statement of support for the Term Sheet and the Plan on the Bonistas’ website, (iii) make Bonistas available to “on island,’ bondholders to answer questions regarding the Term Sheet, the Plan, Disclosure Statement, Confirmation Order and other Definitive Documents, and (iv) support legislation that may be necessary or appropriate to implement the transactions contemplated by the Term Sheet.

Those parties who are part of the Aurelius challenge may continue in the case but:

hereby covenants and agrees that, no matter the determination and the entry of a Final Order in connection with the Appointments Related Litigation, with such determination and Final Order being entered either prior to consideration of approval of the Settlement Motion or confirmation of the Plan by the Title ITI Court or subsequent to entry of an order approving the Settlement Motion and confirmation of the Plan, such Party (i) shall not urge or argue that such determination and Final Order reverses, affects, or otherwise modifies the transactions contemplated herein, in the Term Sheet, in the Settlement Motion and in the Plan and (ii) in the event that such determination and Pinal Order (y) occurs prior to approval of the Settlement Motion and confirmation of the Plan and (z) causes or requires the reconstitution or reappointment of the Oversight Board, such Patty shall urge and request that such reconstituted or reappointed board ratify the terms and conditions of this Agreement and the Term Sheet and promptly seek approval of the Settlement Motion and confirmation of the Plan by the Title III Court.

Pursuant to section 7.5, the agreement is governed by New York law, and jurisdiction is set for the Title III Court. This agreement is throughout the GDB, COFINA and PREPA agreements. In other words, these agreements are far removed from Puerto Rico’s legal institutions. Guess that is what happens when you hire New York law firms. As part of the agreement:

The Commonwealth-COFINA Dispute shall be compromised and settled pursuant to the Settlement Motion in the Commonwealth PROMESA Proceeding, on the one hand, and pursuant to the COFINA Plan of Adjustment, as defined below, on the other hand, with (i) COFINA being granted an ownership interest of the COFINA Portion, as defined below, and (ii) the Commonwealth being granted an ownership interest of the Commonwealth Portion (Underlining added)

In addition, in a section entitled COFINA Plan of Adjustment, it is further clarified:

Contemporaneously with the filing of the Settlement Motion, the Oversight Board, on behalf of COFlNA, will file the COFINA Plan of Adjustment and disclosure statement related thereto. The COFINA Plan of Adjustment shall provide, among other things, (i) that, as of the COFINA Effective Date, COFINA will be the sole and exclusive owner of the present and future revenues and collections generated by the five and one-half percent (5.5%) of the sales and use taxes imposed by the Commonwealth (the “COFlNA Pledged Taxes”) up to the COFINA Portion (Underlining added)

What is important is that the Commonwealth surrenders its claim that its power to tax cannot be surrendered as per Article VI, section 2 of the Puerto Rico Constitution. One can argue that the Puerto Rico Constitution is not applicable as per the agreement but this does not apply to non-parties. In addition, what would prevent future governments from claiming that the agreement is contrary to the PR Constitution and therefore null ab initio? We must remember that section 314(b)(3) requires that “the debtor is not prohibited by law from taking any action necessary to carry out the plan.” If the plan requires the surrender of the taxing power, is that legal? We must remember that the UCC in the COFINA litigation claimed that the taxing power could not be surrendered as per the Constitution. Who is right? Questions, questions.

Although originally all of the money deposited with New York Mellon bank up until July 1, 2018 was to be distributed to COFINA, now $78,355,837.63 will be distributed otherwise, with $33,355,837.63 going to the Commonwealth. Complicated.

The breakdown of the settlement is that Senior COFINA bondholders will receive 93% of their bond (although some analyst state this could be as high as 96%) and Junior COFINA bondholders will receive 53.399%. A very good deal for COFINA seniors and not so good deal for COFINA Juniors, originally purchased by local elites.

The Plan of Adjustment for COFINA will have the following classes (although the Board reserved the right to alter this):

Class 1: Senior COFINA Bond Claims

Class 2: Senior COPINA Bond Claims (Ambac Insured)

Class 3: Senior COFINA Bond Claims (National Insured)

Class 4: Senior COFINA Bond Claims (Taxable Election)

Class 5: Junior COFINA Bond Claims

Class 6: Junior COFINA Bond Claims (Assured Insured)

Class 7: Junior COFINA Bond Claims (Taxable Election)

Class 8: GS Derivative Claim

Class 9: General Unsecured Claims

Interestingly, Class 9 will not “receive a distribution pursuant to the COFINA Plan of Adjustment; provided, however, that, notwithstanding the foregoing, in the event that Class 9 votes to accept the COFINA Plan of Adjustment, each holder of a COFINA General Unsecured Claim shall be entitled to receive its pro rata share of One Hundred Thousand Dollars.” Since the Plan of Adjustment must be approved by all classes, does the Board actually want this class to say no, so it can force a cramdown via section 314(c)?

Bonds to be paid by the insurers have different rules so it is important to review this carefully. In addition, the agreement calls for actions by the Legislature:

Legislation and Documentation: On or prior to the COFINA Effective Date, legislation shall be enacted to amend (or repeal and replace) the existing COFINA legislation to, among other things, (i) establish the independent COFINA board of directors referred to in Section II (L) above, (ii) permit the sales and use tax, tax exemption, substitution of collateral and non-impairment provisions referred to herein and ( iii) grant such other authorizations, if any, which may be required to implement the transactions contemplated herein, including, without limitation, (a) a determination that COFINA is the owner of the COFINA Portion under applicable law, (b) a grant of a statutory lien on the COFlNA Portion to secure the payment obligations with respect to the COFINA Bonds and COFINA Parity Bonds, in whole or in part, or otherwise in accordance with the ABT, (c) enhanced financial reporting, (d) events of default and imposition of certain measures upon an event of default (e) submission to the jurisdiction of the Title Ill Court, and (f) other customary terms, conditions, and covenants for similarly structured and supported municipal bonds that are acceptable to the PSA Parties. To the extent applicable, the foregoing terms and such other terms as may be agreed upon shall be included in the new bond resolution authorized by COFINA. (Underlining added)

With the clear war that Senate President has waged with Governor Rosselló, will he dare to say no to surrendering the Constitutional power over COFINA taxes? Will the Legislature continue to defy the Board? No idea at this time.

Nor do we have an idea at this time if the General Obligation bondholders will object to this agreement. They filed motions for summary judgment in the COFINA litigation and the stay on the determination of all motions in the case is fast approaching. Will the creation of a new GO group, allegedly more willing to compromise according to the Wall Street Journal, change the dynamics of this deal? The GO’s blocking of the COFINA deal will depend on whether they are offered a similar or better deal. If they don’t block the COFINA deal, they will lose much of their bargaining power to get a similar or better settlement. We shall soon find out.

In other news, the Board informed the Commonwealth that its new fiscal plan is also non-compliant. It requires the Commonwealth to provide more information how Act 154 revenues increment in $5.9 billion; a reduction in payroll expenditures (possible firings as per Ms. Jaresko’s statements to the press?); either eliminate the Christmas bonus or increase savings somewhere else (and Mr. Carrión has made it clear that the Commonwealth cannot take money from one part of the budget to pay this without Board consent), reflect payments to PREPA, and payroll freeze language should eliminate “if continued.”

Moreover, the Boards position on pensions remains (10% reduction to be implemented in 2019) and the Commonwealth is informed that its plan “cannot budget to pay Social Security contribution costs of its employees; rather, the budget only provides for the employer contributions.” Finally, the numerous references to the need for statehood must be eliminated. Although I am a staunch statehood-er, I concur with this assessment.

The Board also noticed the Commonwealth that the UPR fiscal plan was deficient. It wants increases to the graduate students tuition and exemptions to tuition. In addition, the Board warns on the need of elimination of positions being vacated, saying “[f]ailure to achieve savings required in the June Certified Fiscal Plan through voluntary attrition may require intentional headcount reduction.” OUCH! Finally, the UPR is given the same warnings on Christmas bonuses and pensions.

Last week the Southern States Energy Board made an announcement “Strategizing an Electric Energy Policy & Regulatory Framework in Puerto Rico” as to its role in Puerto Rico and also announced the membership of its “Blue Ribbon Task Force—a force with the assignment to make recommendations regarding the functions of a Puerto Rico regulatory agency with responsibilities for ensuring a safe, reliable, and resilient electric grid that provides a strategic energy plan for the future.” Although Bruce Walker had said that the SSEB was in charge of the development of a policy and legal framework to provide a regulatory regime for a potential privatization of the PREPA electric system, now it seems that is not the case. In the Frequently Asked Questions of the website, it states:

Does SSEB have a role in the reformation and privatization of PREPA and its regulation?

No. SSEB is not an advisor in efforts to reform and privatize PREPA. SSEB will not be making or influencing decisions related to PREPA’s privatization or how it is ultimately regulated. That decision resides with the Government of Puerto Rico. However, SSEB will examine the current state of the privatization effort to inform the drafting of appropriate regulatory models for consideration by the Government of Puerto Rico.

This is extremely confusing. The website confirms that the Department of Energy is funding this effort and my recollection is that Mr. Walker of the DOE stated that it was giving the SSEB $1.3 million to deal with the sale. If now it is not dealing with it but will only examine the effort, what is the money for? Is the DOE aware and in agreement with this? In any event, this seems to make any idea of DOE involvement with PREPA nothing more than wishful thinking on our part.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.

Monday Update – August 20, 2018

Welcome to your weekly Title III update for August 20, 2018. Some important things came about inside and outside the case.

Previously, I discussed the UCC motion on the COFINA deal, which has not been answered by the Board as of Sunday, August 19. To that we must add that El Vocero reported on August 18 that due to demographic changes that seem to increase the number of inhabitants in the island, the Board requested that the Commonwealth amend its Fiscal Plan. El Vocero adds that there will be a greater need for medical services and hence less money for debt service. Given the Board’s alleged new deals of around 75% payment of bond debt, it behooves the mind that now these numbers may be reduced because the population will not decrease as much as expected. Constant changes in the Fiscal Plans do not make it credible and will undermine any plan of adjustment based on it. Seesaw on the Fiscal Plan helps no one.

The Board sent the Commonwealth a friendly reminder of the new perceived power schemes. Its letter says:

Pursuant to Section 204(b)(2), the Oversight Board established the rule, regulation, administrative order, and executive order review policy (the “Policy”) to require prior Oversight Board approval of certain rules, regulations, administrative orders, and executive orders proposed to be issued by the Governor (or the head of any department or agency) to assure that they “are not inconsistent with the approved fiscal plan.”

As relevant here, the Policy applies to any proposed rule, regulation, administrative order, or executive order in connection with (i) the establishment, governance, management, or operation of the Office of the CFO, and (ii) rightsizing of the Commonwealth or related to procurement, contracting policy, or employee compensation or benefits. The Policy states that any rule, regulation, administrative order, or executive order must be sent in English before issuance to the Oversight Board at [email protected] with an explanation of how the particular rule, regulation, administrative order, or executive order is consistent with the approved Fiscal Plan.

On August 13, 2018, the Department of Treasury submitted three letters in Spanish on Administrative Orders, without an explanation of how or whether the Administrative Orders were consistent with the applicable Fiscal Plan, that had been issued prior to the date of adoption of the Policy, and which the Oversight Board had not requested to review. Accordingly, no review or approval by the Oversight Board is required at this time. However, going forward, please abide by the Policy, including by submitting any rule, regulation, administrative order, or executive order in English, prior to adoption, and with an explanation of how it is consistent with the applicable Fiscal Plan.

Why the public reminder of what the governor must do? Simply because the governor said he was not going to comply with this “request.” This way, there can be no doubt the Board is bending over backwards to resolve any controversies with the governor in an “amicable” fashion while at the same time, publicly chastising him for not obeying. A very bad situation in my opinion.

The Board also sent the Commonwealth a letter requesting the submission “by the Department of Treasury of all the contracts, whether in the form of Tax Incentive Decrees or otherwise, that confer tax abatement or tax relief on a taxpayer, entered into since July 1, 2017 and henceforth.” As to each contract, the following information, inter alia, has to be provided:

Budget Questions:

a)Are the funds for the contract included in the budget? i) If yes, in which allotment? Please specify (A) the line item(s) in the budget that this contract will be funded from and (B) what other expenses have been committed or planned for that budget item.

b)Does the existing budget fully cover the cost of the contract? If multiple line items, please specify the amount against each budget line. i) If not covered in the budget, which allotments need to be reprogrammed?

c)If the contract extends past the current fiscal year, does the current budget line item include the full cost of the contract or only the portion applicable to the current budget time period? i) If only the portion applicable to the current budget, how much will be funded from the future budget? Are the budget line items the same and are there sufficient funds within those? Please provide supporting evidence.

Fiscal Plan Questions

a)Is the contract consistent with the applicable Fiscal Plan? Please provide some commentary on why or why not.

b)Does the contract constitute separate and additional disaster aid spending?

i)Will the contract be partially or fully federally funded?

  1. ii) RFP information

(1) Name:

(2) Issue date:

(3) Due date:

(4) Award date:

(5) Applicable RFP rules and regulations:

(6) Amendments (Yes or No):

(7) Description of efforts undertaken to advertise the RFP

Although this is clearly important information for the Fiscal Plan and budget, tax policy, tax assessment and tax abatement is one of the most important powers any government can wield. Although the information will probably be provided, what if the Board disallows any of these contracts? Will Governor Rosselló again mount Rosinante and attack the windmills of the Board? Questions, questions.

Also, at the end of the attachment to the letter, the Board requests a certification stating the following for each contract:

1.[Name of Agency], its officials and employees have complied with all applicable conflicts of interest laws, rules, regulations and policies in connection with the procurement and negotiation of the contract2.

2.To the best knowledge of the signatory (after due investigation), no person has unduly intervened in the procurement, negotiation or execution of the contract, in contravention of applicable law.

3.To the best knowledge of the signatory (after due investigation), no person has: (i) offered, paid, or promised to pay money to; (ii) offered, given, or promised to give anything of value to; or (iii)otherwise influenced any public official or employee with the purpose of securing any advantages, privileges or favors for the benefit of such person in connection with the contract.

4.To the best knowledge of the signatory (after due investigation), neither the contractor, nor any of its owners3, directors, officials or employees, or its representatives or sub-contractors, has required, directly or indirectly, from third persons to take any action with the purpose of influencing any public official or employee in connection with the procurement, negotiation or execution of the contract.

The above certification shall be signed by the head or general counsel of the agency submitting the contract for review.

In the event that the agency is not able to provide any of the above certifications, it shall provide a written statement setting forth the reasons therefor.

This smacks of the Board investigating whether these contracts are nothing more than favors to political contributors or obtained through fraudulent means. Again, this is a very reasonable request but will the governor comply? We will soon find out.

The GDB filed its “Solicitation Statement” for the Title VI it is attempting. The 300 plus document has this interesting tidbit:

In addition, the New Bonds are complex financial instruments with unique characteristics that are unlike many similarly named instruments. Because of the unique nature of the New Bonds, substantial uncertainty and risk exist with respect to the New Bonds that may not exist with respect to other debt instruments. For example, the Issuer is a newly formed statutory public trust and governmental instrumentality with no existing operations, and the New Bonds will be secured by, and payable solely from, Collections on certain assets of GDB that will be transferred by GDB to the Issuer on or after the Closing Date. Holders of New Bonds should not expect to receive payment in full in cash of principal and interest due on the New Bonds. While there are scenarios that may result in full payment of principal and interest on the New Bonds in accordance with their terms, there is considerable uncertainty as to whether the Restructuring Property will provide sufficient cash flow to pay interest in cash on the New Bonds and amortize the principal amount (and any PIK Amounts) thereof completely. In addition, if the Qualifying Modification is consummated and the Participating Bond Claims are mandatorily exchanged for the New Bonds, rights and remedies under the New Bonds will be dramatically different, and may be less favorable to holders of the New Bonds, than the rights and remedies holders of Participating Bond Claims currently have. For additional information on the New Bonds, see the Offering Memorandum attached hereto. At the same time, there is substantial uncertainty regarding the value of the Participating Bond Claims if the Requisite Approvals are not obtained or the Qualifying Modification is otherwise not consummated. GDB is insolvent and has operationally wound-down and substantially terminated its operations, other than the completion of the Qualifying Modification and the management of certain assets thereafter; the outcome of its liquidation or other resolution is highly uncertain. A holder of Participating Bond Claims could realize more or less value on its Participating Bond Claims in such a liquidation or resolution than in the Qualifying Modification.

In other words, if you vote for the Title VI qualifying modification, you may not be paid but if you don’t vote, we may go into Title III. Since the only asset that the GDB has is loans to public corporations and municipalities, the minute these stop paying, the GDB will not pay its bonds and there will be no recourse since that is the only source of payment. I have always said that this Title VI, if approved, would end in Title III. Might as well do it now with full value of your bonds than later when you have a 45% haircut.

On the litigation side, Judge Swain sided, once again, with the Board and decided that certain ERS bonds did not have a lien because the liens were not properly recorded. Although the Judge may very well be right, this case will be appealed and Judge Swain is 0-3 on appeals at this time.

In Assured v. Board, defendants had requested a stay of proceedings while the Ambac appeal (where Congressman Duffy filed his brie of Amicus Curiae) is decided. Judge Swain, unsurprisingly sided with the Board saying:

The issues on appeal in Ambac are sufficiently related to the issues presented by Plaintiffs’ complaint to warrant a limited stay of these proceedings. Through their complaint in this proceeding, Plaintiffs claim that the April 19, 2018 Fiscal Plan for Puerto Rico violates PROMESA §§ 201(b)(1)(B), 201(b)(1)(M), 201(b)(1)(N), and 407 and § 928 of the Bankruptcy Code; that the Fiscal Plan Compliance Law (Act No. 262017) violates PROMESA §§ 201(b)(1)(N), 201(b)(1)(M), and 201(b)(1)(B); and that the April 19, 2018 Fiscal Plan does not meet the definitions prescribed by PROMESA §§ 5(10) and 5(22). Plaintiffs contend that they are entitled to an order declaring that no plan of adjustment under PROMESA Title III can be confirmed based on the April 19, 2018 Fiscal Plan; that no confirmation hearing will be held on that plan; that a series of moratorium laws enacted by the Commonwealth and corresponding moratorium orders (“Moratorium Laws” and “Moratorium Orders”), the April 19, 2018 Fiscal Plan, and the Fiscal Plan Compliance Law violate the Contracts Clause, Takings Clause, and Due Process Clauses of the U.S. Constitution; that the Moratorium Laws, Moratorium Orders, Fiscal Plan Compliance Law, and the April 19, 2018 Fiscal Plan are preempted by PROMESA §§ 303(1)(3); and that if this Court determines that PROMESA bars review of the April 19, 2018 Fiscal Plan, Plaintiffs are entitled to a ruling that PROMESA violates the Due Process Clause of the United States Constitution and is an unconstitutional delegation of legislative power. See Dkt. No. 1.

In Ambac, Ambac Asssurance Corporation also questioned the legality of the Moratorium Laws, Moratorium Orders, the Fiscal Plan Compliance Law, and an earlier version of the Fiscal Plan for Puerto Rico. See Amended Adversary Complaint (Dkt. No. 35 in 17AP159). On appeal, Ambac Assurance Corporation presents eleven issues for the First Circuit to consider including, inter alia; whether the District Court erred in holding that the Moratorium Laws, Moratorium Orders, and the earlier Fiscal Plan do not qualify as laws preempted by PROMESA § 303(1); whether the District Court erred in interpreting the Contracts Clause and Takings Clause of the United States Constitution; whether the District Court erred in issuing an opinion on PROMESA § 106(e); and whether the District Court erred in interpreting PROMESA § 106(e) to preclude judicial review of the Fiscal Plan for compliance with the requirements of PROMESA § 201(b).

While this Court appreciates the distinctions and clear differences between Plaintiffs’ complaint here, and the claims brought in Ambac, many of the questions presented on appeal in Ambac either directly overlap with or significantly bear on the determinations this Court will have to make in deciding any dispositive briefing in this proceeding.

If there are “distinctions and clear differences between Plaintiffs’ complaint here, and the claims brought in Ambac” why grant the motion? For Judge Swain clearly states that is not the norm, especially when there are issues that will have to be decided in this case irrespective of what the First Circuit decides. My opinion, however, is of no importance. Judge Swain’s opinion is what counts.

On the Utier challenge to the Board’s appointment, essentially the same argument that Aurelius made, unsurprisingly Judge Swain dismissed the complaint. The next day, Utier filed their notice of appeal. I am sure the union’s counsel will hustle to see if it can join the Aurelius oral argument presently set for September 10, 2018. Irrespective, that is going to be an epic argument. Wish I were there.

In the Pinto Lugo v. USA, a hodgepodge of legal claims, the USA filed a motion to dismiss challenging standing and the actual causes of action, saying among other things that “[t]here Is No Private Right of Action under the Declaration of Independence.” I expect this complaint to be dismissed as it is another attempt by those who refuse to understand or accept Congressional power over Puerto Rico.

As expected the Legislature filed a notice of appeal from the dismissal of their complaint. Once this was done, Governor Rosselló, who is at odds with Senate President Thomas Rivera Schatz, vowed he would also appeal. As of August 19, 2018, he had not, nor requested leave to do so.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.

The COFINA Deal… on the Verge of Collapsing?

The Commonwealth Agent in the Commonwealth v. COFINA adversary proceeding – the Unsecured Creditors Committee (UCC) –filed an informative motion on Monday on the Oversight Board’s agreement with COFINA bondholders and monolines.

The motion states that the UCC-COFINA Agent deal was done with the May 2018 certified Fiscal Plan, meaning that the deal was feasible based on the numbers projected in that plan. On June 29, 2018, a new Fiscal Plan was certified with entirely different numbers and economic calculations. Instead of using those new numbers, the Board used the May 2018 to reach the COFINA deal.

The UCC claims a $28 billion cash flow deficit as a result of the deal.

Furthermore, the UCC claims in footnote 4 of their motion the following:

The Commonwealth Agent was not included in the negotiations between the Oversight Board, the COFINA bondholders, and monoline insurers regarding the terms of a COFINA plan of adjustment. In fact, the Commonwealth Agent only received a copy of the COFINA Plan Presentation when it was made public.

Right there, you know something is wrong.

The UCC negotiated the first agreement in principle but wasn’t included in the most recent COFINA deal orchestrated by the Board. Although the Board is obviously the one who deals with the Plan of Adjustment – where the payment of the debt is outlined – not having the Commonwealth Agent involved raises suspicions and with good reason.

Revisiting Conflicts of Interest

Moreover, if it is such a good deal for COFINA, it raises the significant, but dormant issue of potential conflicts of interest of the Board members.

To recap the potential conflicts of interest for new readers of the Control Board Watch, here they are. First, José Carrión’s relationship with Banco Popular, which had significant involvement with COFINA. Second, Carlos M. García, a former Santander executive and GDB President who issued a huge chunk of COFINA debt under former Governor Fortuño. Third, Ana Matosantos’s company, Matosantos Commercial Corporation, has a Banco Popular executive on its Board of Directors. And finally, José Ramón González, another Santander executive deeply involved with COFINA.

Is there a conflict of interest?

The motion continues stating:

The Oversight Board’s June 29, 2018 certified fiscal plan materially revised certain of the underlying assumptions that formed the basis of the May 30, 2018 certified fiscal plan, which was in effect when the Agents entered into the Agreement in Principle on June 5, 2018 and on which the Commonwealth Agent relied when entering into the Agreement in Principle.

In stark contrast to the cash flow projections in the May 30, 2018 certified fiscal plan, the revised assumptions in the June 29, 2018 certified fiscal plan result in a significant cash flow deficit (when including the COFINA debt service payments under the contemplated settlement) in the aggregate amount of approximately $28 billion (in nominal dollars), even assuming that the fiscal plan contemplated making no plan distributions to Commonwealth creditors. Obviously, assuming that there would be no payments to any Commonwealth creditors is unrealistic and would lead to an unconfirmable plan of adjustment for the Commonwealth.

Given that the Commonwealth Agent must consider the interests of the Commonwealth itself, the Commonwealth Agent does not believe that a settlement can be executed and/or consummated which would lead to a significant cash flow deficit (and thus the Commonwealth’s inability to pay current expenses) of approximately $28 billion (in nominal dollars). The Commonwealth Agent believes that this Commonwealth feasibility issue needs to be resolved prior to execution and/or consummation of a settlement agreement. It also does not appear that this issue was addressed in the COFINA Plan Presentation.

The UCC is warning that Puerto Rico cannot pay the COFINA deal with the currently certified Fiscal Plan. Of course, the Board has not answered this motion and may not do so since it is an informative motion, but it probably will.

In addition, the Board  may amend the current Fiscal Plan to conform it to this and future deals. As a matter of fact, the Board has already stated they may do so. If the Board does amend the Fiscal Plan, and does so in a manner that allows the COFINA deal to comply, is the Board greenlighting a sweetheart deal for COFINA for the benefit of certain interests, and possibly the conflicted Puerto Rican Board members?  Let’s see.

Nevertheless, the UCC’s warning is dire. The UCC is not only the Commonwealth agent in the aforementioned litigation but is also the official committee representing all non-secured creditors, who want to be paid. It cannot abide by a deal that will give all monies to one or more secured creditors and leave none for the non-secured creditors. To this effect, the motion also states:

Furthermore, under paragraph 4(i) of the Stipulation, any settlement requires the consent of at least one of the two Commonwealth Creditor Representatives. At the time of execution of the Agreement in Principle, only the Official Committee of Retirees (the “Retiree Committee”), which is one of the Commonwealth Creditor Representatives, had advised the Commonwealth Agent that it supported the Agreement in Principle. In connection with the negotiation of settlement documentation, the Retiree Committee has advised the Commonwealth Agent that it also views the resolution of the Commonwealth feasibility issue as a pre-condition to execution and/or consummation of a settlement agreement.

The Commonwealth Agent remains dedicated to attempt to resolve this issue to allow for a settlement to proceed, although it recognizes that the formulation and certification of a revised fiscal plan is completely outside of its control. Nevertheless, the Commonwealth Agent will proceed with its discussions of this issue with parties in interest and continue its collaborative process with the COFINA Agent in order to reach agreement on a settlement agreement that conditions consummation thereof on the Oversight Board having certified a fiscal plan that projects Commonwealth net cash flows (after measures) over the next 40 years in an amount not materially less than the net cash flows (after measures) projected in the May 30, 2018 certified fiscal plan.

The Commonwealth agent is saying that for the deal to go through, the Board and COFINA bondholders need either the UCC’s support or that of the Retirees’ Committee (who are owed over $52 billion and are non-secured creditors). Although the Retiree’s Committee is closer to supporting the deal, the UCC makes it clear that they still don’t have their support. Could it be that one of the two important deals the Board has achieved is slipping away?

Options for the GO’s

This development brings us to the another question, what will the GO’s do? Undoubtedly, the GO’s will want a good deal, better than that of COFINA. Question is, will the Board provide one? If the GO’s cannot get a deal, what can they do? There are many avenues. The Commonwealth v. COFINA litigation is stayed until September 13. With the UCC’s motion, it is obvious the deal is in peril. The GO’s were allowed to intervene in the Commonwealth v. COFINA litigation and filed dispositive motions expounding their views on the validity of these bonds. The GO’s may request that the Court decide on their arguments. If denied, they can file an adversary proceeding. Moreover, the GO’s may object to any COFINA Plan of Adjustment and we must remember that Judge Swain has said that at that stage she will be able to review the Fiscal Plan since the Plan of Adjustment must conform to the Fiscal Plan. If she decides that the UCC is right or that COFINA is not constitutional, she may deny the confirmation of the Plan of Adjustment. In addition, even if the GO’s are not allowed to object to the COFINA Plan of Adjustment, as part of the stipulation, the COFINA settlement must be approved in the Commonwealth Title III case, where undoubtedly the GO’s will have a say.

The UCC’s motion has thrown a monkey wrench into the COFINA deal, one which unless carefully explained by the Board could well derail it. Much more is to come. Stay tuned.

Monday Update – August 13, 2018

Welcome to your weekly Title III update for August 13, 2018. Many important things came about this week, but I discussed Judge Swain’s decision on the Commonwealth and Legislature’s complaints and the Commonwealth-COFINA deal in separate postings. The First Circuit, however, reversed Judge Swain in two cases and developments in and outside the Title III have developed.

In the first of the Circuit opinions, the Court (Judge Kayatta writing the opinion) decided that Peaje did not have a statutory lien—however, that did not end the discussion. The First Circuit affirmed Judge Swain’s determination not to allow evidence of any other type of lien in the adversary proceeding but hinted that if raised in another case, it could be litigated. In addition, Judge Kayatta reversed her findings, “that Peaje failed to establish irreparable harm and that defendants established adequate protection of Peaje’s interests.” Since the Court had already decided the main issue of the case, it did not have to analyze this topic. Nevertheless, anticipating further litigation, it reversed the “brief treatment” of these essential issues. I project either further litigation or a prompt settlement of these bonds by the Board.

In the second case where the Ad Hoc Group of PREPA bondholders requested the lifting of the stay to permit them to request from another court the appointment of a receiver, the First Circuit (Judge Kayatta also being the author) went one by one over Judge Swain’s reasons to deny the petition and reversed her on all of them. Of note is the following:

The Title III court did try to deflect these problems by stating that its refusal to lift the stay arose in the context of a request for a receiver, certainly a robust form of interference with the debtor’s finances and property. The implication – which the debtor’s brief makes express — is that perhaps the Title III court would lift the stay to allow another court to provide some other type of protection of collateral. But neither the Title III court nor the debtor points to any toehold in the language of Section 305 that would accommodate a distinction allowing the Title III court to lift the stay to allow another court to interfere with the debtor’s property sometimes but not others. Either Section 305 only bars the Title III court itself from interfering, or it bars that court also from lifting the stay to allow another court to do that which it cannot do. And it is only the latter, broader possibility that creates a situation in which the creditor is deprived of any means of protecting its property interest.

The Title III court also pointed out that Section 305 would not bar section 362(d) relief when the Oversight Board consents to the requested relief. But the principal aim of section 362(d)(1) is to protect the creditor when protection is needed, which is customarily when the debtor is not obliging. In short, saying that a creditor can get relief from the stay when the debtor’s representative consents effectively wipes out section 362(d)(1) precisely when it is most likely needed.

We also find no inconsistency between the apparent purpose served by Section 305 and a reading of that section as only barring the Title III court itself from directly interfering with the debtor’s powers or property. Like the Title III court, we read Section 305 as respectful and protective of the status of the Commonwealth and its instrumentalities as governments, much like section 904 of the municipal bankruptcy code respects and protects the autonomy of states and their political subdivisions. See 11 U.S.C. § 904. When a bankruptcy or Title III court acts directly, it impinges on that autonomy. But when it merely stands aside by lifting the automatic stay, it allows the processes of state or territorial law to operate in normal course as if there were no bankruptcy.

In addition, Judge Kayatta stated:

For these reasons, we hold that Section 305 does not prohibit as a matter of course the Title III court from lifting the stay when the facts establish a creditor’s entitlement to the appointment of a receiver in a different court in order to protect a creditor’s collateral should that protection otherwise be necessary and appropriate. Although we share the Title III court’s concerns about the deleterious impact that a robust receivership outside the Title III court’s control might have on the efforts of the Title III court to consolidate and adjust the debtor’s affairs, those concerns are best addressed in deciding whether, precisely to what extent, and for what purpose relief from the automatic stay might be granted. In other words, it might be possible to grant tailored relief for the creditor to seek a receivership provided that the receiver only take specific steps necessary to protect the creditor’s collateral. Further, concerns about moving the locus of the debtor’s protections outside the Title III court are greatly ameliorated by the fact that the Oversight Board itself can always, through consent, opt for a regime held more tightly within the federal forum’s direct control. (emphasis supplied)

To me, it is obvious the First Circuit is inviting Judge Swain to allow the receiver but to tailor what it can or cannot do. In their briefs and during oral argument, plaintiffs emphasized that this receiver would substitute the PREPA governing board and would not only be subject to the Board’s Fiscal Plan, but also to its budget and its general powers. Moreover, the last sentence above from Judge Kayatta hints that the Board could consent to a receiver with specific duties and responsibilities. After I heard the oral arguments in this case, I wrote that the First Circuit was likely to reverse Judge Swain. This may have been a catalyst for the Board’s agreement with PREPA bondholders. Food for thought.

José Ortiz, the new executive director of PREPA gave an interesting interview to Caribbean Business . Caribbean Business reports Ortiz admitted that the “Ad Hoc deal comprises $5 billion in unsecured debt. “And we negotiated with 35 percent of them [the creditors], or about $2.7 billion. The rest we are going to have to pay…that has not been said publicly,” he told Caribbean Business.’” Since the Board has admitted that this group does have a lien, I assume that Mr. Ortiz meant the insured bonds, which I pointed out before would probably get a better deal. Here, he is saying they will get paid in full and the only way this can be achieved is with an increase of the rates. WOW! So much for the Board’s insistence on a 20 cent per K/H rate!

Finally, on Friday, the Board sent a letter to Puerto Rico’s Secretary of Corrections, informing him that the Comprehensive Management Agreement with Correctional Health Services Corporation was in excess of $10 million, was not sent to the Board before signing, and hence was invalidated. Also, the letter states:

 Please be advised that the new contract, scheduled to commence October 1, 2018 with Physician HMO, Inc., must be submitted to the FOMB prior to execution and with sufficient time to review (e.g., two weeks minimum). It should be noted that given that the contract extension is expected to generate $840,000 in savings, it is the expectation of the FOMB that DCR must generate a further $4,159,731 of healthcare related savings through both procurement and personnel measures.

In addition, the submission from DCR, must answer the following questions:

  1. Are “difficult recruitment employees” (as such term used in the original documentation) covered under the new agreement?

  2. The Fiscal Plan requires that $3,309,151 savings be generated by the procurement of healthcare for inmates and a further $1,690,579 in personnel savings related to inmate healthcare for FY19. Please outline how you will achieve these savings – inclusive of the extension and new contract and other related contracts

  3. The savings for FY20 increase to $13,236,605 for procurement of healthcare services for inmates and $6,762,317 for personnel related to these healthcare services. Can you please provide the pathway to deliver these savings?

Right after the Board announced it was not going to appeal Judge Swain’s decision on Zamot but announced it would require new Fiscal Plans, I said the Board wanted to rule from the Fiscal Plan. After Judge Swain’s decision on the Commonwealth and Legislature’s challenges, that is exactly what it is doing. I frequently criticize the Board for its actions but it is trying to put some limits to political spending in Puerto Rico. Politicians continue to believe that they can spend without limit, without understanding that at some point in the near future, debt service will recommence. Then what?

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.


On August 8, 2018, the Commonwealth and COFINA Agents announced a new, more lucrative deal on COFINA.

In fact, this is a coup for the COFINA bondholders: the aggregate recovery is almost 75%, and a 93% for COFINA Seniors.

This is a stunning turn of events. COFINA faced months of heavy attacks both from the GOs questioning their constitutionality, and from the Governor, who wanted access to the lockbox monies.  Moreover, in April 2017, COFINA holders were offered a 39.2% recovery.

Deal Details

Essentially, 53.65% of the “Pledged Sales Tax Base Amount (“PSTBA”) cash flow through and including 2058 (40 years) is fully allocated to the New COFINA Bonds.” The Commonwealth will keep the remaining 46.35% of this PSTBA, plus any excess of up to 5.50% of the SUT, which the Board calculates will increase in value. Hence, the new bonds will be secured (senior pledge) but by a decreased part of the SUT. The Board still believes it is a large amount of money. Also, from the terms of the agreement, it seems the monolines are on board with the deal.

Interest rate as to CIB’s is Total/Avg $9,249,560,000.00 @ 4.543%, but which works out as follows (page 5):

2028 995,875,000.00    4.350%

2032 1,206,510,000.00 4.500%

2038 3,212,925,000.00 4.550%

2043 3,834,250,000.00 4.600%

Interest rate as to CAB’s is Total/Avg $2,697,682,642.20 $15,401,229,579.75 5.500%

2058 2,697,682,642.20 15,401,229,579.75 5.500%

The breakdown of the recovery is as follows (page 8):

Aggregate Par + BNYM Recovery (in %)

COFINA Sr. Recovery 93.000% COFINA

Sub. Recovery 56.399% RSA Acceptance Charge 2.000% Aggregate Recovery 74.505%

Looming Questions

This tentative agreement, however, leaves a lot of questions unanswered.

Is the deal a result of pressure from Congress?

Is the deal a realization that the Board and Governor lack credibility in Washington?

A big question will be what the GOs do, if anything? Can the Commonwealth afford such a sweetheart deal after 2 years of non-stop claims by the Board and Governor that Puerto Rico is broke, and unable to pay her debts?  We should assume the confirmation of the COFINA Plan of Adjustment will be challenged in the Commonwealth Title III confirmation hearing. Although I am sure Judge Swain will sweep aside any objections, the First Circuit may not.

The Commonwealth may believe it is entitled to a bigger part of the 5.5% of the pledged SUT. Will it insist on more? What will Judge Swain do?

Moreover, the GO’s were allowed to intervene in the Commonwealth v. COFINA litigation and to file a motion for summary judgment. What if they insist on having a determination on their claims? Seems easier to come up with a deal for them than to continue litigating.

Does the deal have the requisite 2/3 amount majority and 50 +1 number of creditors required by the Plan of Adjustment or are the parties still working on it?

Now that we have almost 75% recovery for COFINA and 77.5% recovery for PREPA, is this the new bench mark? It is true that the GDB agreement has only 55% recovery, but its law states that the Commonwealth is not liable for its debts and has no assets except loans. It is only reasonable to wonder if other bondholders will receive the same deal. If so, the Title III may be resolved quickly and cheaply, and we may have wasted hundreds of millions of dollars and precious time that the Board and Governor cannot bring back. Let’s see what happens.

Monday Update – August 6, 2018

Welcome to your weekly Title III update for August 6, 2018. Well, I don’t know about you, but it definitely seems like there is movements due largely to rising political pressures on the Oversight Board and the governor from Washington.

First, last week I mentioned that two independent sources have confirmed that the Commonwealth-COFINA deal is very close to completion. In a sign that there is still room to go, the Commonwealth and COFINA agents requested an extension until September 13, 2018 to complete the settlement, which interestingly is the same date as the Omnibus hearing. The motion seems to indicate the agreement does not have the necessary number of approvals. The Court gave the parties one day to object and since no one did, agreed to the extension. Both the Government of Puerto Rico and the GO bondholders had reserved their right to object, but did not raise one at this time. Either they did not have an objection or they realized the Court would grant it anyways and are bidding their time. My sources tell me that Fortaleza will sign-up to the deal, as the Governor desperately needs a win in the face of non-existent credibility outside of Puerto Rico in the lead up to his 2020 re-election campaign. Let’s wait and see.

Also of great importance, as I had predicted, the First Circuit set oral argument for the Aurelius case for September 10, 2018. If a decision comes down by November, not an unrealistic forecast, the case could be before SCOTUS by December. In addition, if certiorari were granted, a decision would come down no later than June 30, 2019. In the same vein, Assured filed an adversary proceeding challenging the Board’s appointment as unconstitutional. Last week, the Board and Assured filed a stipulated judgment, which the Court quickly entered, accepting the applicability of Judge Swain’s decision in Aurelius to the case. Right after the judgment, Assured filed a notice of appeal and it is likely the case will be consolidated with the Aurelius oral argument. Case moving right along.

A group of ERS bondholders filed a supplementary motion for the lifting of the stay, including 1,264 pages of documents, seeking a timetable for the hearing. The Board objected saying that the Court had ruled it would determine at the next Omnibus hearing whether the ERS bondholders have a lien. The Retirees Committee joined the Board. To me, it’s more efficient to have the whole thing at the Omnibus rather than piecemeal, but let’s see what Judge Swain decides.

I discussed the proposed PREPA bondholders deal in [another posting], but what is related to it is the Board’s certification of a new Fiscal Plan for the utility. In the past, the Board had insisted that the utility’s rate should be at or below 20 cents per kilowatt/hour. In the new Fiscal Plan however, the Board states that due to increase in fuel costs, in the next few years, the rate would fluctuate between 27-30 cents per kilowatt/hour. This is in addition to the Transition Charge that will be imposed on consumers if the agreement comes through.  In addition, the Fiscal Plan mentions that in June and July there would be meetings with the unions to discuss different matters.  I asked Utier’s attorney about said claims and he said there had been no such meetings. The Fiscal Plan calls for reductions of PREPA’s contribution to the employees’ medical plan and elimination of Christmas bonuses. Although PREPA may alter the collective bargaining agreement even before it is rejected, see, NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984), the common sense thing to do would be to meet with the union beforehand to see if there could be areas of agreement. The last thing PREPA and Puerto Rico need is for the Government to unilaterally impose changes to the collective bargaining agreement and have the unions go on strike without previous negotiations.

Predictably, Governor Rosselló instructed the PREPA Board to reject the Fiscal Plan or at least those parts dealing with the rate increase and labor provisions. As disagreeable as a rate increase may sound, there is no doubt that they would come given that PREPA’s fuel costs, as per the Fiscal Plan, have increased in 34%. In addition, the reduction of labor benefits is consistent with what the Board has mandated to the Commonwealth and the governor has resisted. More importantly, the actions from the Board and the governor over electricity rates is deplorable.  They are simply not being honest with the Puerto Rican people or the courts.  Clearly, the path to de-politicization has a long way to go.

Finally, in a little reported case in Federal Court named Consejo de Salud de PR v. USA, federal judge Gustavo Gelpi reserved his ruling on a petition by the U.S. Department of Health. The U.S. Agency is trying to dismiss a lawsuit filed by the Puerto Rico Health Center “MedCentro Centro” and several Medicare and Medicaid beneficiaries alleging violations of the Equal Protection clause in regards to unequal Medicare funds to U.S. citizens residing in Puerto Rico. Essentially, plaintiffs and the government are trying to convince Judge Gelpí that Puerto Rico is an incorporated territory, while the defendant U.S. Government warned the Court that Puerto Rico had cited with approval the territorial cases in the PROMESA litigation. If Puerto Rico is deemed an incorporated territory, then it will receive more Medicaid funds. But, with that decision, the Board, Puerto Rico and the U.S. Government’s arguments against the Aurelius case would be weakened. It seems that the parties need to decide what battle is worth fighting. The U.S. Government also reminded the Puerto Rican Government that it doubted it wanted to have the 5th Amendment challenges in several adversary proceedings to be reviewed under strict scrutiny, like it wants done in Judge Gelpí’s case. I warned about these actions by the Rosselló administration in a Caribbean Business column and specifically mentioned the doctrine of judicial estoppel, which is what the U.S. was clearly referring to. That is what happens when you put short-term goals ahead of long-term initiatives.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.

A Short Legal Review of the Latest PREPA RSA

Well, here we go again. Another day, another PREPA RSA.  We’ve had almost a week to digest the RSA and listen to the myriad of press conferences on whether this will or won’t lead to higher electricity prices.

But here is the most important question we should be asking: Will this time be any different than the previous RSAs?

In the almost 2 years since the Oversight Board came into existence and Governor Rosselló walked backed his campaign pledge to do deals, one thing has become patently obvious: the credibility of these parties is as bankrupt as Puerto Rico.

The Oversight Board and Governor Rosselló need to show progress and to regain credibility. They are also worried about federalization.

To start, the agreement is not much different from the RSA previously rejected by the Board in June of 2017. Nothing in this RSA accomplishes the Board’s original vision when they decided to rebuke the will of Congress, and take PREPA to Title III.  This included wiping out PREPA’s lien and erasing the entirety of the contractual debt of PREPA, raising the specter of a Takings Clause claim. With this RSA, none of that gets accomplished and there is no Taking Clause claim.

Whose In, Whose Out

The bondholders that own or control at least 2/3 of the dollar amount of the outstanding non-insured bonds, section 10.02(a)(vi). Hence, the agreement is not with the insurance companies or the fuel line banks. Like the previous RSA’s, its members cannot transfer (sell) their bonds to any other entity than those involved in it, section 5. The agreement, at Section 8, states:

Without limitation to the provisions of the Term Sheet, the reasonable fees and reasonable expenses of the members of the Ad Hoc Group incurred in connection with the RSA, the Definitive Restructuring Support Agreement, and any documents and transactions (including a plan of adjustment) relating to or implementing the foregoing on or after July 23, 2018, limited to one (1) primary law firm, one (1) municipal bond counsel law firm, one (1) Puerto Rico law firm, one (1) financial advisor, and one (1) utility consultant, shall be reimbursed by PREPA on a monthly basis within forty-five (45) days following submission of an invoice and redacted time detail summary to counsel to the FOMB, PREPA and AAFAF.

Section 10 notes that the agreement may be terminated by mutual consent, or by a breach of the agreement. The only remedy for a breach is the termination of the agreement as listed in section 11.13. In addition, section 10.02(b) says the agreement ends on August 27, 2018, at 5 pm, New York City time, but can be renewed through another agreement. Moreover, New York state law on contracts applies and jurisdiction for any disputes is the Title III court, section 11.03, and the parties obligations are several, not joint and several, as stated in section 11.14.

Economic Terms (i.e. – Electricity Prices)

Where things get interesting is in the economic terms of the agreement, which start at page 33 of the PDF file. It states, inter alia:

 The members of the Ad Hoc Group and any other holders of PREPA Bonds subject to the RSA (the “Supporting Holders”) shall commit to exchange all of their uninsured bonds for Securitization Bonds (as defined below) on the terms and in the manner set forth below.

 The Puerto Rico Electric Power Authority Revitalization Corporation or a new bankruptcy-remote special purpose vehicle as may be agreed upon shall issue Tranche A and Tranche B Securitization Bonds, secured by the Transition Charge.

This is the same system of the rejected RSA. The economic agreement also states as to the bonds:

 The Transition Charge allocable to the outstanding power revenue and revenue refunding bonds issued by PREPA under the 1974 Trust Agreement shall be set at the following levels:

– 2.636 c/kWh for Years 1-5

– 2.729 c/kWh for Years 6-10

– 2.868 c/kWh in Year 11

– Starting year 12, annual 2.500% increases over the prior year’s Transition Charge

 The Transition Charge allocable to the outstanding power revenue and revenue refunding bonds issued by PREPA under the 1974 Trust Agreement shall be capped at 4.348 c/kWh

Similar to the previous RSA, there will be an additional charge for consumers but Governor Rosselló and José Ortiz have claimed, and then backed off, that there will be no increase because the switch to gas will lower rates by 6 cents by kWh. This is difficult to believe for the switch to gas will take time. Moreover, if the agreement is approved as part of the plan of adjustment, it would only start next year. The exchange rate will be as follows:

 67.5% of PREPA Bonds to Tranche A Bonds

 10.0% of PREPA Bonds to Tranche B Bonds

 Tranche A Bonds will extend beyond the stated maturity if not paid in full on the stated maturity, until paid in full, including unpaid interest.

 Unpaid interest on the Tranche A Bonds will accrete.

 PIK interest to accrue annually starting in Year 1.

 Tranche B Bonds shall receive 100% of total excess cash flow after repayment of the Tranche A Bonds. Potential recovery on the Tranche B Bonds shall be capped at the exchange amount, plus PIK interest.

 Tranche B Bonds will mature at stated 45 year maturity, and all unpaid debt service will expire unpaid.

 Tranche A Bonds: 40 year stated maturity, subject to early mandatory redemption from sweep of Transition Charge cash flow (35 year expected maturity under Oversight Board’s May 2018 projections, which may change)

 Tranche B Bonds: 45 year stated maturity

 Tranche A Bonds: 5.25% cash interest

 Tranche B Bonds: 7.00% PIK interest / 8.75% PIK interest to the extent the Tranche B Bonds are not tax-exempt (solely for portion that is not tax-exempt)

According to sources I consulted, this deal gives bondholders a 22.5% discount (67.5 + 10), which is 2.25% more than the rejected RSA from last June. It also extends the life of the bond for many years, with Tranche A being further extended if one year’s payment cannot be made in full. Also, the interest rate for Tranche A is competitive with a securitized instrument. Not bad. In addition, the agreement states:

 No default on either Tranche A or Tranche B Bonds for failure to pay scheduled debt service, so long as full amount collected under the Transition Charge (minus administrative fees) is used to pay debt service. Interest shall continue to accrue (and pay-in-kind, as applicable) and accrete at the original Coupon rate.

 The Transition Charge shall extend, and interest shall continue to accrue (and pay-in-kind, as applicable) at the original Coupon rate, until the later of (1) the date necessary to pay the Tranche A Bonds in full, even if past their stated maturity, and (2) the earlier of (i) the stated maturity of the Tranche B Bonds, and (ii) the date on which the Tranche B Bonds are paid in full.

 Remedies will be mutually agreed upon and will include, at a minimum, the right to replace the Transition Charge servicer and the right to enforce the Securitization Bonds’ trust agreement, the servicing agreement, and non-impairment covenants. Requirements for replacement servicer to be mutually agreed upon as part of Definitive Documentation.

Again, not a bad deal for bondholders. Finally, there is a mention of other creditors:

The Ad Hoc Group shall not object if other legacy debt holders (including fuel line lenders) receive the same treatment with the same terms as the Ad Hoc Group is receiving, so long as such treatment does not adversely affect the Ad Hoc Group’s recoveries. Adjustments to coupons and par are authorized, so long as total cash flow payable each year remains the same (with proportional adjustments for the varying claim sizes of varying legacy debt claims), and so long as such treatment shall not adversely affect the Ad Hoc Group’s recoveries.

In other words, the deal for the insured bondholders may be better as long as the amounts to be received by the non-insured’s does not change. That also applies to the fuel line lenders who are owed around $700 million. Hence, the haircut per bond may decrease further, taking it closer to the 20% of the rejected RSA. In addition, the monolines could get other valuable considerations, as Syncora did in the Detroit bankruptcy (i.e., a parking lot concession worth millions). On July 31, Assured Guarantee rejected the agreement, insisting in the previous RSA they claim is grandfathered. Don’t doubt they will insist on getting a better deal than the non-insured.

Reality Setting In

This deal begs the question, what happened?

Up until recently, the Board and the government were claiming that PREPA bondholders only had a net lien, meaning that the utility’s expenses were paid first. If there was anything left over, only then were the bonds paid–hence they had no collateral. Now, it is given new collateral and will increase the rate consumers pay for electricity. What changed? I think the Board and the government are worried about Congress taking over PREPA in one way or another and want to show that they can get the job done in a way that is very similar to the previous RSA, which Chairman Bishop insisted should not have been rejected. With the COFINA deal pending, this would show that the Board and governor are serious about doing deals.

One of the many unanswered questions is whether this deal will make it more difficult to privatize PREPA. I have mentioned before that I don’t think the politicians in the island want to sell it, not even the generation part, but the Board was insistent on it. We will see.

The PREPA unions and the PDP have already voiced opposition to the deal. Very likely they will sue to block it. The next few months are going to be very interesting indeed.