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PUERTO RICO Debt Restructuring

Tuesday, Oct 24, 2017

Seema Balwada, CFA  /  October 24, 2017

Puerto Rico Debt Restructuring Litigations Continue to Advance…

As disputes on liens pivotal to Puerto Rico’s Title III debt restructuring move forward, bondholders eye upcoming court dates.

The Court has ordered expedited schedules for most disputes that relate to liens provided to bondholders. Bond-holders with lien rights on specific revenue streams, such as COFINA Bonds secured by sales tax revenue, Employee Retirement System Bonds and Highway and Transportation Bonds have asserted the U.S. Constitutions’ Contracts Clause, Takings Clause and Due Process Clause. PROMESA enacted by U.S. Congress in 2016 requires any Fiscal Plan to respect bondholder rights within the relative lawful priorities or lawful liens. Amid Puerto Rico’s rebuilding with federal funds, lawmakers, bond insurers and investors believe that Puerto Rico must reset its relationship with creditors, correct the defects in the maligned Fiscal Plan that became the subject of numerous lawsuits and work collaboratively to meet statutory requirements of PROMESA, Commonwealth Constitution and U.S. Constitution. Bondholders’ court case against the U.S. for the misdeeds of Puerto Rico’s Oversight Board carries far reaching implications. Bondholders with lien rights have made compelling arguments in Court. Bond insurers are among top advocates of bondholder rights.

Puerto Rico PROMESA Law Changes Possible: Chairman of the House on Natural Resources Cmte Bob Bishop told reporters the authority of Puerto Rico’s Oversight Board that PROMESA created needs to be examined. Bishop plans a hearing with Governor Rosselló in Washington and a visit to the Island this week.

COFINA Has a Valid Statutory Lien On Puerto Rico Sales Tax Revenue: Judge Swain is seeking an expedited consensus on the “Commonwealth-COFINA Dispute” which has emerged pivotal to Puerto Rico’s Title III bankruptcy. The dispute about who is entitled to about $700 million a year in sales tax money that guarantees payment of COFINA sales tax bonds is under mediation. Agents representing the particular interests of COFINA and the Central Government are working to reach a consensual court ordered resolution. Bondholders claim that they have a priority statutory lien on a dedicated portion of sales tax revenue pledged to pay bondholders prior to the General Fund receiving any sales tax revenue. Puerto Rico Government says sales tax revenues are exclusive rights of the Commonwealth; earlier both the Federal Board and Puerto Rico stated they may need to borrow money from COFINA if the General Fund runs out of cash. As several legal opinions from the Puerto Rico Dept of Justice and numerous bond counsels have confirmed, major bondholders, hedge funds, Assured Guaranty, National and AMBAC believe the legal structure of COFINA is sound and maintains a valid statutory lien on the sales tax revenue stream backing COFINA bonds. In October of 2016, a group of General Obligation (GO) bond-holders alleged that sales tax revenue pledged to COFINA bonds were available resources for GO bond repayment.

Hurricane Maria has extended petitions for a COFINA summary judgement from December 1, 2017. The parties may file for summary judgement prior to February 12, 2018. On October 20, the parties agreed that discovery could be complete by February 9, 2018.
Judge Judith Dein, a federal magistrate judge for the U.S. Dis-trict Court of District of Massachusetts, has undertaken pre-trial management of the Commonwealth-COFINA dispute.

U.S. is Accountable For Oversight Board’s Confiscation of Bondholder Property: On July 19, 2017 Secured bondholders commenced an action in the U.S. Court of Federal Claims to obtain just compensation from the U.S. for the taking of bondholders’ constitutionally-protected property. A similar action was also filed in the District Court of Puerto Rico. Employee Retirement System bondholders claim Congress authorized Puerto Rico to seize cash that belonged to bondholders, violating the U.S. Constitution: Puerto Rico’s Federal Board approved legislation Joint Resolution 188 on June 30, 2017 which orders Puerto Rico’s Employee Retirement System (ERS) to sell its assets and to transfer the net cash proceeds into the Puerto Rico Treasury Secretary’s account as part of the General Fund for fiscal year 2017-2018 to pay pensioners; ERS bonds are secured by collateral that includes all employer contribu-tions from Puerto Rico government employers and the ERS’s legal right to receive those contributions. Bondholders’ claim is founded on the U.S. Takings Clause (U.S. Constitution, Fifth Amendment), which applies to the States and Commonwealth (U.S. Const. Fourteenth Amendment), provides that “private property shall not be taken for public use, without just compensation”. Bondholders allege that recent legislation effectively take property from secured creditors in order to give more to unsecured creditors which is not a “public use” within the meaning of U.S. and Puerto Rico Takings Clauses.

Puerto Rico “Clawbacks” Are Illegal: Bond Insurers Assured Guaranty, National Public Finance Guarantee, FGIC, AMBAC, and bondholders assert that constitutional preconditions for Puerto Rico’s “clawback” of highway revenues since November 2015 were not met.

“The Commonwealth’s asset grabs began on November 30, 2015. Then Governor Alejandro García Padilla unilaterally issued the first in a series of executive orders mandating the “clawback” of revenues pledged to secure the bonds of certain Puerto Rico public corporations “revenue bonds”, including bonds issued by Highway and Transportation Authority (HTA). Notwithstanding the fact that the constitutional preconditions for such clawback were nowhere near satisfied and indisputably subordinate non-debt expenditures were being protected and paid,” AMBAC complained to the Court. In a separate lawsuit, Bond insurers allege “these revenue grabs by the Commonwealth effectively take pledged special revenues that are property of PRHTA held in trust for holders of PRHTA bonds and illegally divert them to the Commonwealth’s General Fund.” Separately, bondholders allege destruction of bondholders’ lien rights, the taking of bondholder collateral and impairment of Puerto Rico HTA Bonds secured by a valid, enforceable, first priority lien on certain HTA toll revenues. The Supremacy Clause of the U.S. Constitution preempts illegal diversion of revenues. Roughly $340 million annually was clawed back illegally by the Commonwealth for a year and a half. HTA bondholders argue that pledged revenues are “special revenues” exempt from automatic bankruptcy stay because PROMESA incorporates applicable sections of U.S. bankruptcy code.

U.S. Dept of Treasury is Accountable For Puerto Rico’s Illegal Rum Tax Diversion: In May 2017, AMBAC filed a complaint against U.S. Dept of Treasury and the Secretary of U.S. Treasury alleging that Puerto Rico’s ongoing diversion of rum taxes violates the Contracts, Takings and Due Process Clauses of the U.S. Constitution. This case concerning Puerto Rico infrastructure bonds backed by rum taxes is stayed until the final disposition of the Title III process.

Oversight Board is Unconstitutional; Its Actions Are Void: On August 7, 2017 in separate complaints, GO bond-holder Aurelius Investment LLC and a Puerto Rico electric workers’ union UTIER asked the U.S. District Court of Puerto Rico to dismiss Puerto Rico’s Title III petition, on the grounds that the Federal Board in charge of Puerto Rico’s finances is unconstitutional. Former U.S. Solicitor General and constitutional scholar Theodore Olsen, on behalf of Aurelius Capital Management, argues that the creation of the Fiscal Control Board violates the Appointment Clause and separation of powers of the U.S Constitution. Bondholders say PROMESA disregarded the U.S. Constitution’s method of appointment, instead devising an unconstitutional scheme of congressional encroachment.

Court Ordered Schedule To Determine Legality of Federal Oversight Board: By November 6, 2017, the U.S. Government is expected to express its opinion on the constitutionality of PROMESA; by November 17 claimant Aurelius LLC has to reply to opposition; by December 1 claimant UTIER has to reply to opposition; by December 6 the U.S. Government has to file its brief; by December 23 all parties to reply to the U.S. District Court; Jan 10, 2018 Court hearing in New York.

Puerto Rico Governor Wants Court Cases to Move Forward: A confirmed plan of adjustment is critical to Puerto Rico’s ability to grow its economy and have renewed access to the capital markets, the Government of Puerto Rico stated to the Federal District Court in charge of Puerto Rico’s Title III debt restructuring “It remains in Puerto Rico’s best interest that these Title III cases continue unimpeded by Hurricane Maria to resolve Puerto Rico’s legal uncertainties and the resulting economic uncertainties and stay on a course to emerge from these Title III cases as promptly as possible.”

Upcoming Court Dates

25-Oct-17 Court Hearing Commonwealth-COFINA Dispute, FEMA Funds

2-Nov-17 Court Hearing on (i) Bond insurers' complaint against PR's illegal revenue grabs (Assured Gty, National, FGIC, AMBAC Vs Puerto Rico Highway Authority) and (ii) Bondholders' Complaint Against Puerto Rico obstructing discovery re: ERS Lien Perfection (Employee Retirement System Vs Altair)

6-Nov-17 United States Attorney General will express opinion on constitutionality of PROMESA

15-Nov-17 OMNIBUS HEARING

21-Nov-17 Court Hearing on bond insurers’ complaint against Puerto Rico's alleged illegal clawbacks, special revenue protections

13-Dec-17 Court Hearing re: Employee Retirement System complaint against Altair re: ERS lien perfection

20-Dec-17 OMNIBUS HEARING: Commonwealth-COFINA Dispute Motions to be heard

10-Jan-18 Court Hearing on Bondholder Complaint re: Federal Board Appointment (Aurelius, UTIER, United States)

Commonwealth-COFINA Dispute On October 20, parties agreed to:

25-Oct-17 (i) Court Hearing & (ii) Amended Complaint with certain technical corrections to be filed by the Commonwealth Agent

30-Oct-17 COFINA Agents’ amended answer responding to corrections due

6-Nov-17 Permitted Intervenor to file respective positions; Others who wish to intervene to file motions

20-Nov-17 Agents to file answer and counterclaims to pleading of Permitted Intervenors

21-Nov-17 Oppositions are due to motions to intervene made by parties other than Permitted Intervenors

29-Nov-17 Permitted Intervenors to file answers to any counterclaims asserted against them

5-Dec-17 Replies are due in support of motions to intervene made by persons other than Permitted Intervenors

8-Dec-17 Commonwealth including COFINA, GDB, AAFAF, Puerto Rico Dept of Treasury and Puerto Rico Dept of Justice to complete document production

20-Dec-17 OMNIBUS HEARING: Commonwealth-COFINA Dispute Motions to be heard

26-Jan-18 Agents shall complete taking fact discovery and Agents shall submit expert reports

9-Feb-18 Agents shall complete expert discovery

Parties May Settle Or Move For Summary Judgement Prior To February 12, 2018

If you have any questions or desire updated information contact your GMS Account Executive. Information taken from sources deemed reliable. This update does not purport to include all available information

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