COFINA

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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JUDGE BESOSA REFUSES TO STAY LEX CLAIMS COMPLAINT

 

 

On February 17, 2017, Judge Besosa decided important issues in the Lex Claims litigation. In this case, plaintiffs, a group of GO bondholders, seek an injunction against the use of the sales tax to pay COFINA bonds, claiming they have first lien on “available resources” as per the Puerto Rico Constitution.

 

Defendants included, inter alia, the Government of PR, COFINA and its Executive Director, who filed various motions to stay the litigation. In addition, Ambac, a monoline that insures COFINA senior bonds, COFINA Senior Bondholders, Puerto Rico based bondholders and Mayor COFINA Bondholders (subordinate COFINA bondholders) filed motions to intervene, as did the Board.

 

Judge Besosa reviewed all of defendants’ arguments for the stay in great detail and rejected all. Hence, the claims for injunction against the payment of COFINA bonds and violation of civil rights (42 U.S.C. § 1983) will go forward. In addition, Judge Besosa granted intervention to all that sought it, except for COFINA Senior Bondholders since their request was limited to claiming the stay was applicable.

 

What will happen now? It is clear Judge Besosa wants to resolve the GO/COFINA controversy, which makes it unlikely that he will send it to the PR Supreme Court. Moreover, the case is what we call paper litigation. The issues before the Court revolve around an interpretation of the PR Constitution, the Constitutional Convention, the 1961 Amendment to the Constitution and its legislative record, COFINA statutes, its legislative record and the bond documents. There is no need for a hearing since there would not be any testimony, expert or otherwise as happened in the previous litigation on the stay.

 

Can PR or other defendants “appeal” Judge Besosa’s decision? Not really. The Federal system is hostile to appeals where there is no final determination of the issues. For example, in the Peaje litigation that recently went to the First Circuit, there was a final order since once the decision favored the stay, “there was nothing left for the district court to do.” Here, however, there is much left to do. Of course, defendants may seek leave from the District Court to appeal and then seek appeal via 28 U.S.C. § 1292(b). The First Circuit, however, is very hostile to this type of appeal and rarely grants it. Hence, defendants will have to continue with this litigation.

 

How long can it take? I am sure plaintiffs are at this time preparing their motion for summary judgment to have the Court decide the issue quickly and I have no doubt he will do so. Remember that the First Circuit reminded Judge Besosa “In conducting such proceedings, the district court should be mindful of Congress’s explicit direction to ‘expedite’ its disposition of the matter ‘to the greatest possible extent.’” Section 106(d) of PROMESA.

 

What should PR and the Fiscal Supervisory Board do? Both the Board and PR have said they will not take sides on the controversy but I think they should. GO’s and COFINA amount to half of PR’s bond debt ($18 billion in GO related and $17 billion in COFINA) and there is no chance on voluntarily restructuring GO’s unless the issue is resolved since they will claim, with certain reason, Constitutional priority. A quick decision on the issue would not only resolve the issue but if COFINA is illegal, it would lose any claim to a stream of income from the sales tax, it would not have a pledge and lien and in a Title III proceeding would be an unsecured creditor. The Court could then reduce its indebtedness close to zero. Let’s see what happens.

El JUEGO DE MELBA

 

 

El Gobierno de PR tuvo reunión con sus bonistas ayer y entre otras cosas ENDI nos dice que:

 

La jornada de reuniones se llevó a cabo en Nueva York en las oficinas del estudio legal Cleary Gottlieb,  donde -según fuentes de  El Nuevo Día- se llevaron a cabo unas cuatro reuniones para discutir la estructura legal que tendrá el llamado “superbono”, cómo este nuevo instrumento se repagaría y el calendario de trabajo y negociación que se seguirá hasta consumar una transacción no más tarde de mayo de 2016.

 

La mayoría de los analistas entendían que PR iba a dejar de pagar los $1.299 billones que tiene que pagar en diciembre/enero hasta que el Senador Grassley indicó que iba a tener una vista pública sobre la situación de PR. Esto fue en gran medida una velada amenaza a la administración de Alejandro García Padilla de que si impaga, la Junta de Control Fiscal Federal viene. De igual forma, si PR impaga en esa cantidad de dinero, los bonistas tendrán que acudir a los tribunales haciendo menos probable una transacción sobre la deuda.

 

Parece ser que PR quiere llegar a un acuerdo con sus bonistas antes del pago grande de 1ro de Julio de 2016, que es de $1.919 billones. Pero no es menos cierto que la negociación de la AEE de $8.2 billones ha tardado 15 meses y aún no se ha terminado, una negociación de decenas de billones va a tardar mucho más, especialmente cuando envuelve GO’s y COFINA. Por ende, es altamente dudoso que se pueda completar para mayo de 2016. Pero, como me indicó un ex-político, si PR deja de pagar en diciembre, la posibilidad de una solución legal antes de las elecciones de noviembre es probable. Pero si impaga en julio, las probabilidades de una solución legal antes de las elecciones son bajas.

 

Así que la posibilidad de que PR pague los bonos del Banco Gubernamental de Fomento el 1ro de diciembre aumenta dado la amenaza velada de Grassley, la necesidad de complete el acuerdo de la AEE para el 10 de diciembre y el deseo de mantener a los bonistas negociando. Por el otro lado, la única manera de convencer a los bonistas de que PR no tiene con que pagar es dejando de pagar. Así que en pocos días veremos que ocurre.