Bonds

BONDHOLDER NEGOTIATIONS AND THE ROAD TO NOWHERE

The Negotiation Farce

We are now in April and, come May 1, the PROMESA stay on litigation expires. Where are we on bondholder negotiations? What happens if there is no Title VI restructuring?

It looks like the answers to those questions might be “nowhere” and “we’re about to find out,” respectively.

Last year, the Oversight Board announced with great fanfare the start of bondholder’s negotiations set for December 19, 2016, but aside from a meet and greet session, nothing happened. And that has remained the case even after the board certified Governor Rossello’s second fiscal plan last month.

After certifying the plan, the board requested that the two senior-most bondholder groups, General Obligations and COFINAs, enter into private mediation to settle their ongoing dispute.

This request kicked off a flurry of letters from creditors, including joint letters authored by holders of some $13 billion of both GO and COFINA debt, which outlined numerous criticisms of the fiscal plan. The letters also asked the government to commence negotiations with bondholders immediately, arguing that the stay expires too soon to waste time negotiating a creditor dispute rather than negotiating with all bondholders.

Despite these overtures, however, the Puerto Rican Government and the Board have not moved onto negotiation, and have instead pushed forward with the mediation process, assigning Judge Allan Gropper to serve as mediator in talks reportedly starting tomorrow and lasting through the end of the week.

Why? To Sow Confusion

It appears that the Oversight Board and the Government are intentionally conflating mediation between two creditors in active litigation and actual negotiation with creditors.

It is impossible that a real solution to the GO/COFINA dispute will be brokered over a mere 48-72 hours, especially given the numerous, unaddressed problems that parties on each side have with the fiscal plan. Moreover, even if a settlement was reached, there will be only two weeks for real negotiation to occur after the mediation ends.

But the Board does not appear genuinely interested in a resolution to the dispute or conducting serious negotiation talks. Rather, I think the board is intentionally confusing the issue with the hope of stalling for Title III.

Once the stay runs out, the Board will most likely say that the mediation proceedings themselves actually qualify as a good faith effort toward reaching a consensual agreement under Title VI of PROMESA, and will use that to justify throwing the entire process into a Title III restructuring.

Will Mediation Count as a Good Faith Effort at Negotiation?

Mediation is a type of alternate dispute resolution where a supposedly neutral person helps the parties involved to resolve their disputes. It is not the same thing as a negotiation, especially when some of the parties say they don’t want to participate in the process.

Section 206 of PROMESA requires the entity (PR) to make “good-faith efforts to reach a consensual restructuring with creditors” before the Board issues a certification for Title III. Good faith negotiations is part of Chapter 9 of the Bankruptcy Code, but the section that deals with it, 109(c), was not adopted by PROMESA. Nevertheless, it is a requirement and likely bankruptcy law precedents will be used by the Courts to determine if there have been any.

To be sure, bondholders will raise this point in court. While we often hear from Oversight Board members and Commonwealth leaders that this process is not subject to judicial review – and while that also seems to be the intellectual opinion of Judge Gonzalez and Marty Beinenstock – I don’t think any judge appointed to oversee the Title III process will just let such a crucial issue like this go unquestioned.

Thus it seems very unlikely that a judge will agree with the Board that its attempts to force bondholders into mediation will satisfy PROMESA’s requirement of a good faith effort at a consensual negotiations.

 

Has the Board or the Puerto Rican Government Provided Sufficient Information for Good Faith Negotiations to Commence?

In the Detroit litigation, the Court determined that the city had not negotiated in good faith for failing to provide sufficient information to make counterproposals and that there was not sufficient time to do so. In this case, negotiations started on June 14 and bankruptcy was filed on July 18. See In Re Detroit, 504 B.R. 97, 175 (E.D. Mich. 2013). As I said earlier, after the conclusion of mediation proceedings on April 14, there will be only 16 days until the end of the stay. Even in the unlikely event that mediation is allowed to constitute part of a negotiation process, there will still only be 18 days between April 13 and the end of the stay.

The issue of sufficient information is important with respect to Puerto Rico’s financial statements, since sec. 206(a)(2) requires PR to adopt   procedures necessary to deliver timely audited financial statements; and . . . made public draft financial statements and other information sufficient for any interested person to make an informed decision with respect to a possible restructuring.

Since the Board’s report by Ernst & Young, at pages 5, 9-10 and 16 states that the financial information it used (provided by the PR Government) is poor, it can hardly mean that it is sufficient for any interested person to make an informed decision with respect to a possible restructuring.

Hence, the way in which these negotiations are conducted and the information provided is of paramount importance for the Title III petition not to be dismissed by section 304 of PROMESA. As of yet, it does not appear that the government has submitted sufficient information for real negotiations to occur.

Does the Fiscal Plan Satisfy Requirements in PROMESA?

It is my belief the Court may review the fiscal plan to determine whether it complies with PROMESA in the intersection of sections 201(b)(1)(N) and section 314(b)(7). Section 201(b)(1)(N) requires that the Fiscal Plan “respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality in effect prior to the date of enactment of” PROMESA.

The Fiscal Plan as approved, however, does not do this in any of it sections. In fact it states, at page 6 that it does not determine, inter alia, “the scope, timing or specific use of revenues to be frozen or redirected as ‘claw back’ revenue, the value, validity and/or perfection of pledges or whether any particular bond or debt issuance may have been improvidently issued” Since the Bankruptcy plan, pursuant to section 314(b)(7), must be “consistent with the applicable Fiscal Plan certified by the Oversight Board under title II” one can argue that any Bankruptcy Plan based on a deficient Fiscal Plan is invalid and hence the Court would have to make said review of the Fiscal Plan. Moreover, the Fiscal Plan cannot violate the US Constitution and bondholders seem poised to make that challenge.

What if the Court were to find that the Bankruptcy Plan is not consistent with what should be the Fiscal Plan? Pursuant to 11 U.S.C. § 930 (adopted in PROMESA by section 301), if the Court could determines that the Bankruptcy Plan could not be certified, it can dismiss the proceeding and PR would not have the protection of the automatic stay.

Or is the Strategy to File for Title III, then Negotiate?

Given all of these obvious shortcomings of an impending Title III petition, it’s worth asking why the Board would file for Title III and risk having it dismissed. The answer likely lies in Section 304(b) of POMESA, which does not allow the dismissal of a Title III petition during its first 120 days.

Therefore, the Board could use this window to negotiate AFTER filing Title III (including Court mandated mediation as in Detroit) and then claim that it negotiated in good faith. It could then aver that it would be a shame to dismiss the claim after all this time. Essentially, the board could file for Title III with full knowledge that its petition will most likely be rejected, if only to buy itself four more months.

Let’s see.

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CONSOLIDATION OF CASES WITH JUDGE BESOSA

 

 

As we know, there are several bond insurers and other bondholders who have sued PR in Federal Court challenging the constitutionality of the island’s Moratorium law and several of Governor García Padilla’s executive orders, which are being presided by Judge Francisco Besosa. These cases are:

 

Brigade Leveraged Capital Structures Fund, Ltd. v. García Padilla, 16-1610. Plaintiff, a group of GDB bondholders, claim that the PR Moratorium Act, the new GDB liquidation procedure and the Governor’s Executive Orders are unconstitutional and also preempted by the Bankruptcy Code. Also, Brigade filed a motion seeking a recognition that its case was not stayed under PROMESA and in the alternative, that the stay be lifted. There is no prayer for money payment;

 

National Public Finance Guarantee Corporation v. García Padilla, 16-2101. The complaint seeks to declare the Moratorium law unconstitutional. National filed for summary judgment the after the Supreme Court affirmed the invalidation of the PR Recovery Act in Franklin California v. Commonwealth. There is no prayer for money payment;

 

Trigo v. García Padilla, 16-2257. Plaintiffs, a group of PR bondholders, filed a complaint claiming that the Moratorium law and the new GDB liquidation process violate the PR and US Constitutions. There is no prayer for money payment;

 

Lex Claims LLC v. García Padilla, 16-2374. Plaintiffs are a group of GO bondholders that claim, among other things, that PR violated section 204(c)(3) of PROMESA and although claim that the PROMESA stay does not apply to them, they also see the lifting of the stay. There is no prayer for money payment;

 

Assured Guarantee Corp. v. García Padilla, 16-2384. Plaintiffs filed a request under section 405 of PROMESA for the lifting of the stay. Its tendered complaint has a cause of action for damages pursuant to section 407(a) of PROMESA, which is probably why they sought the lifting of the stay before filing.

 

All these cases are presided by Judge Besosa and it is a good idea that all the cases be decided by one judge, since that way the issue of to what cases the stay applies will have one uniform treatment. Already Judge Besosa has consolidated the first three cases as to the application of the PROMESA stay. Likely there will be a decision by August. What many in the press do not realize is that the PROMESA stay does not work like the stay in Bankruptcy (11 U.S.C. § 362). If within 45-days of the filing of the request for the lifting of the stay the parties have to be notified and the Judge has to hold an evidentiary hearing and determine whether to maintain the stay. If this is not done within the 45-day period, the stay is lifted. Hence, the stay is the exception, not the rule in PROMESA. See, section 405(f) of PROMESA.

 

Moreover, having one judge decide these issues will help the First Circuit to handle any appeals, since pursuant to section 106(d) of PROMESA, they must be handled in an expedited form. This way, all parties will have a fast, clear and efficient way to handle these issues.

 

There is one case dealing with the stay (except for the complaint filed by Ambac where it has acquiesced to the stay against the PR Highway Transportation Authority), which is not before Judge Besosa, to wit, Peajes Investment LLC v. García Padilla, 16-2365. Plaintiffs are beneficial holders of Capital Appreciation Bonds of the PR Highway Transportation Authority seeking to invalidate the Moratorium law and several Executive Orders of the Governor. There is prayer damages pursuant to section 407 and also for funds to be transferred to the Trustee for payment of bonds. This is probably the reason why this case is not before Judge Besosa. Judge Aida Delgado has the case and ordered defendants to answer the petition within 14 days of being served and it expires on August 5, 2016.

 

 

 

 

 

 

 

 

ASSURED GUARANTEE SEEKS LIFTING OF THE PROMESA STAY

 

 

Assured Guarantee Corp. and Assured Guarantee Municipal Corp., which together insure around $1.2 billion of the PR Highway Authority’s (PRHTA) bonds, filed on July 21, 2016, an emergency motion for relief of the PROMESA stay of section 405. They seek the lifting of the stay for Governor García Padilla, pursuant to the PR Moratorium law has allowed the PRHTA to divert pledged toll revenues, taxes from gasoline diesel, crude oil and others, as well as motor vehicle license fees, to pay operating expenses that are subordinate to its bonds and fund “essential services” that include payments of debts to the GDB.

 

The petition claims, quite correctly in my opinion, that the PR Moratorium law is preempted by 11 U.S.C. § 903. It also claims that Section 303 of PROMESA preempts the Moratorium law and the Governor’s executive orders. In addition, Assured avers that the Moratoriums law and the Governor’s executive orders violate the Constitutional prohibition against impairment of contractual rights, that they constitute a taking without just compensation, is a denial of the right to access federal courts, as well as the PR Constitution and laws. Additionally, Assured avers that Moratoriums law and the Governor’s executive orders violate sections 204(c)(3)(A) and 407 of PROMESA. This is similar to what the complaints by Brigade, Lex Claims LLC, y Peaje Inv. See here, here, and here.

 

As I predicted in a recent Forum on PROMESA, Assured and other plaintiffs seek the lifting of the PROMESA stay using Bankruptcy Code precedents, specifically cases interpreting 11 U.S.C. § 362. In my own bankruptcy practice, I have performed this procedure half a dozen times and have yet to fail in obtaining the remedy of lifting the stay. In PROMESA, it seems to be easier since section 405(f) of PROMESA states that if after 45-days of the petition for the lifting of the stay, the Court has not ruled for it to remain, the stay is automatically lifted. Hence, no later than September 5, 2016, Assured’s request has to be denied or the stay is lifted. Although the case has been assigned to Judge Jay García Gregory, he has been recusing himself of other PR bond cases and the case may end up assigned to Judge Besosa who already has 3 others challenging the PR Moratorium Law. I believe that Judge Besosa will rule on these motions by August of 2016.

 

Assured also claims that it does not need to seek the lifting of the stay but if one examines the tendered complaint, one sees that it seeks damages pursuant to section 407 of PROMESA. That request is the reason I believe Assured did not directly file the complaint but instead sought the lifting of the stay. As I said, Judge Besosa will probably have this case assigned to him and will rule on these issues promptly, probably by August of 2016. We will soon find out.