Welcome to your weekly Title III update for May 21, 2018. As last week, the news outside the Court overshadowed the activity inside the Court.

The Oversight Board and Commonwealth announced an agreement on a budget last night. This should come as a surprise to no one. Activity last week indicated that some type of compromise was in the works. When the Board notified the Governor that its budget was in violation of PROMESA, it concludes that the Commonwealth had until May 15, 2018 to provide it with a conforming budget. After meetings and discussions, the Board gave the Commonwealth until May 18, 2018 to provide a conforming budget. The press and other analysts gushed about the wisdom of these conversations in order to bring harmony to these troubled relationships.

The agreement presented with the Board  includes agreement that pensions would not have to be reduced, Christmas bonuses would remain, the Governor’s office and the Legislature’s budget would not be reduced, nor vacation and sick leave. In exchange, the Legislature would file a bill to repeal Law 80. In other words, the Government budget remains intact and only private industry employees will have their rights curtailed.

In typical fashion, Senate President Rivera Schatz reacted surprised to the Governor’s announcement, saying neither he nor the Senate were aware of the agreement. Senator Rivera Schatz is either grandstanding and will reluctantly cooperate, or he will block the agreement. I am inclined to believe the former. Let’s see if there is more to this, or if it is all hot air.

The budget deal helps the Board and Governor present a unified front, which will be necessary as they work to minimize debt payments for the all-important Plan of Adjustment. This is critical. This afternoon at 1:30pm Magistrate Judge Dein will hear arguments the issue of the documents to be provided in Rule 2004 discovery, which the Board insists it does not have to produce. The Board and the Commonwealth are resisting – and for good reason.  If the documents are allowed to be reviewed by creditors – things such as economic projections and the data behind the outmigration claims – it is quite possible the entire Plan of Adjustment bottoms out over the accuracy of the data presented by the Board to date.

Further, the agreement on the budget and the fiscal plan makes a Plan of Adjustment based on the amendments to the fiscal plan highly unlikely to be approved by creditors, who face 70%-80% haircuts. Since the Board has to know this is a likely scenario, it seems they are kicking the can into Judge Swain’s desk, who I feel will not cramdown such Plan of Adjustment, but will suggest that changes be made. It is likely there that the “real” cuts to the Government will occur. That way, neither the Puerto Rico Government nor the Board would be responsible for said cuts. Rather, they will claim we were forced to do this because we had to pay the creditors. Not what Congress originally envisioned as the Board’s job and it will prolong the life of the Title III and the high costs of the case. I will attend the hearing via teleconferencing in the District Court in San Juan.

Last week, the AFL-CIO, requested from the Securities and Exchange Commission an investigation on whether the Governor leaked privileged information to GO bondholders. The basis? The rise in price of GO bonds. Not only is this evidence of nothing, but the AFL-CIO, obviously not happy with the Rosselló administration, forgets that all the information having to do with the fiscal plan was shared with the Board. In any event, I doubt anyone leaked any information to bondholders.

On May 16, 2018, the Board sent a letter to Senator Murkowski as to PREPA and had this to say:

“As the representative of PREPA in the Title III court proceedings, the Oversight Board leads the negotiations to restructure PREPA’s legacy obligations, such as debt and unfunded pension. The Oversight Board also plays an integral role in the process to transform PREPA into a modern electric utility that provides low-cost, reliable energy because any transaction to effectuate that transformation will have to be approved by the Title III court as part of PREPA’s plan of adjustment to emerge from Title III. The Oversight Board has retained Citigroup Global Markets, Inc. as the financial advisor, representing both the Oversight Board and the Government, on any potential transformation transactions. Among other things, Citi intends to conduct a broad market sounding exercise to gauge interest level in participating in any potential such transformation transactions that could entail a long-term concession for the transmission and distribution system and the potential sale of generation assets. This market sounding will help shape the RFQ and RFP process that will be conducted pursuant to the amended P3 legislation that is currently being debated in the Puerto Rico Legislature.”

Since it is not true that Judge Swain has to approve any PREPA sale since section 363 of the Bankruptcy Code was not adopted in PROMESA, the Board wants to make clear to the Senate that it is in charge of the utilities sale. I have seen no reaction from the Commonwealth so I assume they are OK with this. Interesting.

Last week, a COFINA and GO bondholders settlement was announced and although quickly rejected by the Board and AFFAF, it had its impact. It seems that the agreement would leave GO’s with a piece of the COFINA SUT but also with claims against the Commonwealth, something no creditor would accept. Hence, although at first glance it seemed to favor COFINA, it actually favors GO’s. In any event, the American Federation of State, County and Municipal Employees International Union, AFL-CIO (“AFSCME”)—a labor union representing Commonwealth public employees and retirees through its affiliates Servidores Publicos Unidos (“SPU”) and the Capitulo de Retirados de SPU was apparently irked by the proposed settlement. It filed last week a motion stating that “[t]o protect the integrity of Stipulation and any negotiations to settle the Commonwealth-COFINA dispute, AFSCME respectfully asks the Court for exceedingly modest relief: an order compelling the Mediation Team, AAFAF, Oversight Board, and COFINA Agent to comply with the Stipulation by not participating in any discussions to settle the Commonwealth-COFINA dispute with the GO Creditor Representative.”

Bettina Whyte, COFINA representative, quite correctly answered saying she had nothing to say since doing so would violate the confidentiality of mediation. The Board went further and said:

“First, to the extent the Motion insinuates the Oversight Board violated the Stipulation, it is completely wrong. Section 4(n) of the Stipulation expressly provides that notwithstanding anything else in the Stipulation, the Oversight Board can negotiate and propose plans of adjustment that settle the Commonwealth-COFINA dispute. Accordingly, the Oversight Board is fully authorized by PROMESA and the Stipulation to negotiate with any creditors, inside or outside the mediation, and to propose a plan of adjustment resulting from those negotiations, which plan may include a settlement of the Commonwealth-COFINA dispute.”

Also, no action in cases 17-242 and 17-243, the American Federation of State County and Municipal Employees, who sued to set aside the fiscal plan. The cases remain dormant. On the other hand, the UCC, in the case of Cooperativa de Ahorro y Crédito Abraham Rosa v. Commonwealth, 18-28, filed a motion to intervene as follows:

“(i) granting the Intervention Motion and (ii) providing the Committee with the same Participation Rights it received in the Other Adversary Proceedings, including the right to receive document discovery, attend depositions, file briefs, and participate in oral argument, as set out in the attached proposed order.”

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.