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.