PR Debt Crisis

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.

Advertisements

GO BONDHOLDERS SUE PUERTO RICO BASED ON PROMESA

 

 

Ever since President Obama signed PROMESA into law, Governor García Padilla crowed that now bondholders could not sue PR. Not only was he wrong, he was proven wrong today when a group of GO bondholders sued him for violating PROMESA.

 

The Group, that includes Lex Claims, LLC, Jacana Holdings (who also sued in NY Supreme Court), MPR Investors, Rolgs, RRW and SL Puerto Rico Fund, not Stone Lion and Aurelius as originally reported by Reuters. They claim, quite correctly in my view, that PROMESA prohibits the default of GO’s Governor García Padilla has done. Plaintiffs invoke section 204(c)(3) of PROMESA which states:

 

“During the period after a territory becomes a covered territory and prior to the appointment of all members and the Chair of the Oversight Board, such covered territory shall not enact new laws that either permit the transfer of any funds or assets outside the ordinary course of business or that are inconsistent with the constitution or laws of the territory as of the date of enactment of this Act, provided that any executive or legislative action authorizing the movement of funds or assets during this time period may be subject to review and rescission by the Oversight Board upon appointment of the Oversight Board’s full membership.”

 

The complaint avers, quite correctly, that the PR Constitution guarantees the payment of GO’s as a priority, see Article VI, sections 2 and 8. Moreover, PR law prioritizes the payment of this Constitutional debt. Although Governor García Padilla justified his default on the GO debt on the power granted to him by the Moratorium law enacted by the PR legislature, the complaint points out that it is preempted not only by 11 U.S.C. § 903 but also by section 303 of PROMESA.

 

Plaintiffs also aver that not only is the default on GO’s a violation of the PR Constitution and hence PROMESA, but that the 2016-17 budget is a violation of both laws since it does not budget for the payment of the Constitutional debt. It cites Article VI, section 6 of the Puerto Rico Constitution, which states:

 

“If at the end of any fiscal year the appropriations necessary for the ordinary operating expenses of the Government and for the payment of interest on and`amortization of the public debt for the ensuing fiscal year shall not have been made, the several sums appropriated in the last appropriation acts for the objects and purposes therein specified, so far as the same may be applicable, shall continue in effect item by item, and the Governor shall authorize the payments necessary for such purposes until corresponding appropriations are made.”

 

Since the 2015-16 budget did include appropriations for GO’s, the Constitution requires that these appropriations be used for payment of the GO debt and plaintiffs in this case so demand. Again, the claim is that violating the Constitution’s provisions on payments also violates PROMESA.

 

Plaintiffs also aver that this complaint is not stayed by PROMESA. As I have discussed before, the stay in PROMESA applies to cases filed after December 18, 2015 and seek:

 

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the Government of Puerto Rico that was or could have been commenced before the enactment of this Act, or to recover a Liability Claim against the Government of Puerto Rico that arose before the enactment of this Act;

(2) the enforcement, against the Government of Puerto Rico or against property of the Government of Puerto Rico, of a judgment obtained before the enactment of this Act;

(3) any act to obtain possession of property of the Government of Puerto Rico or of property from the Government of Puerto Rico or to exercise control over property of the Government of Puerto Rico;

(4) any act to create, perfect, or enforce any lien against property of the Government of Puerto Rico;

(5) any act to create, perfect, or enforce against property of the Government of Puerto Rico any lien to the extent that such lien secures a Liability Claim that arose before the enactment of this Act;

(6) any act to collect, assess, or recover a Liability Claim against the Government of Puerto Rico that arose before the enactment of this Act; and

(7) the setoff of any debt owing to the Government of Puerto Rico that arose before the enactment of this Act against any Liability Claim against the Government of Puerto Rico.”

 

The complaint states that it does not seek payment of the defaulted amounts and hence the stay is inapplicable. That argument has also been made in Brigade Leveraged Capital Structures Fund, Ltd. v. García Padilla, 16-1610; National Public Finance Guarantee Corporation v. García Padilla, 16-2101 and Trigo v. García Padilla,16-2257. I expect Judge Besosa to rule on this and other issues in these cases by August. Only in Ambac Assurance Corporation v. Puerto Rico Highway and Transportation Authority, 16-1893 has the plaintiff acquiesced to the stay since it is seeking a receiver for the defendant. No such receiver is sought by the GO plaintiffs and it is my opinion that the Court will rule that the stay is not applicable to the case.

 

In addition, plaintiffs point out that millions of dollars were clawed back by PR and that the only justification for such clawback would be to pay for the Constitutional debt but it has gone instead to debts of lesser priority. Again, this could be considered a violation of PROMESA since it violates the PR Constitution. Also “[a]dding insult to constitutional injury, the budget contemplates an increase of more than $500 in non-debt service spending.” Page 19, paragraph 54. This includes an increase of $150 million from the previous year’s contribution to the retirement funds. I can see the malevolent hand of the US Treasury helping its ally, organized labor.

 

The complaint also seeks, similar to the complaint in the aforementioned Brigade case, the lifting of the stay if the Court believes it is necessary. Clearly an averment made in an abundant of caution. Not a bad idea.

 

The complaint, at pages 25-26, seeks a judgment:

 

“A. Declaring that the Commonwealth’s post-PROMESA measures permitting

transfers outside the ordinary course of business or in violation of Puerto Rico’s Constitution and laws to the detriment of holders of Puerto Rico’s Constitutional Debt are invalid under Section 204(c)(3) of PROMESA.

 

  1. Enjoining enforcement or implementation of certain of those measures until the

Oversight Board has made a determination as to their propriety, with such injunction:

(1) requiring the Defendants, in their official capacities as Commonwealth

officers, to segregate and preserve all funds clawed back, to be clawed back, or available to be clawed back under contractual and legal provisions expressly acknowledging that those funds are subject to turnover for purposes of paying of Constitutional Debt;

(2) prohibiting the Defendants, in their officials capacities as Commonwealth officers, from implementing the outsized transfers to the public employee pension funds contemplated in the Fiscal Year 2017 budget and limiting the Commonwealth to the contribution it made in Fiscal Year 2016; and

(3) prohibiting the Defendants, in their official capacities as Commonwealth officers, from implementing the diversion to the insolvent GDB the approximately $250 million contemplated by the Fiscal Year 2017 budget, or such other amounts (such as

those allocated in pending legislation).

 

In synthesis, it is a well-written complaint with a good chance of being granted the remedies it seeks. There is, however, one concern. Section 204(c)(3) mentions the Board but does not specifically state that those affected by these violations would have a cause of action. Clearly, GO bondholders have standing since they have not been paid but the question really is whether they have a cause of action. This question, I believe, is ruled by Gonzaga Univ. v. Doe , 536 U.S. 273 (2002) and that plaintiffs do have a cause of action if not under PROMESA, definitely pursuant to 42 U.S.C. § 1983. We shall soon find out.

EL IMPAGO DEL 1RO DE JULIO DE 2016

 

 

Ayer el Gobernador Alejandro García Padilla, un día después de que entrara en vigor PROMESA, y en contubernio con el Tesoro Federal y el Presidente Obama, incumplió con el pago de la deuda garantizada por la Constitución de más de $800 millones Esto no fue coincidencia. En muchas ocasiones he mencionado que la pugna del pago de la deuda de PR es solo la punta de lanza de la pugna mayor en USA sobre la santidad de estos bonos que tiene grandes repercusiones en esos bastiones demócratas como Illinois, California y New York.

 

Al impagar esta partida antes considerada sacrosanta y protegida por la Constitución de PR , el Gobernador no solo incumple su juramento de proteger y defender la Constitución, si no que aleja aún más a bonistas futuros de la isla. Lo hizo bajo la teoría de que no se puede demandar a PR durante el “stay” provisto por PROMESA (sección 405). Pero como nos tiene acostumbrado, el Gobernador malentiende el “stay”. Ciertamente no se puede demandar a PR en cobro de dinero durante el “stay”, pero el mismo expira el 15 de febrero de 2017, y es prorrogable hasta un máximo de 75 días adicionales, o sea, mayo de 2017 (sección 405(d)). Además, el “stay” se puede levantar el mismo “after notice and hearing” y “for cause shown” (sección 405(e)).

 

En adición, los bonistas de GO’s pueden acudir al Tribunal en sentencia declaratoria solicitando que se declare que la acción de Gobernador viola la Constitución, viola el 11 U.S.C. § 903 (la usada por los Tribunales para anular la quiebra criolla) sin pedir cobro de dinero o en su defecto, solicitar este remedio al mismo tiempo que solicitan que se levante el “stay”. Más aún, hay que recordar que la sección 405(k) de PROMESA indica que “[t[his section does not discharge an obligation of the Government of Puerto Rico or release, invalidate, or impair any security interest or lien securing such obligation.” Finalmente, la sección 405(l) nos dice:

 

Nothing in this section shall be construed to prohibit the Government of Puerto Rico from making any payment on any Liability when such payment becomes due during the term of the stay, and to the extent the Oversight Board, in its sole discretion, determines it is feasible, the Government of Puerto Rico shall make interest payments on outstanding indebtedness when such payments become due during the length of the stay.

 

En otras palabras, las acciones del Gobernador no necesariamente van a estar protegidas por PROMESA. Veremos, pues, lo que pase.