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Muni Week Review / Preview 7/7/2017

Friday, Jul 07, 2017

PUERTO RICO UPDATE

JUDGE DENIES GENERAL OBLIGATION BONDHOLDER GROUP INTERVENTION IN COMMONWEALTH DISPUTE OVER COFINA FUNDS…DISCOVERY RULES SET ON EXPECTED UPCOMING PUERTO RICO GOVERNMENT CLASH WITH COFINA BONDHOLDERS…

PUERTO RICO GO’s DENIED INTERVENTION IN COFINA DISPUTE

Federal Judge Laura Taylor Swain denied participation to a group of Puerto Rico General Obligation (GO) bondholders in an action filed by Bank of New York Mellon (BNYM) trustee of the Sales Tax Financing Corp. (COFINA) with respect to pledged sales tax funds that guarantee payment of COFINA bonds.

On May 16, BNYM filed an action that seeks to have the court determine how the trustee should proceed in regard to paying bondholders with sales tax funds in its possession amid conflicting instructions over said bond payments.

The court had previously ordered BNYM to hold the funds in escrow until how BNYM should handle bond payments is resolved. The court recognizes that the intent of both the government and the Oversight Board is to pool COFINA funds into available resources for an eventual debt restructuring plan. Holders of all Puerto Rico debt with secured liens have said the government’s plan is flawed as it disregards priority liens and bondholder rights. The Board has said it seeks a consensual agreement to resolve the dispute with respect to COFINA revenue.

A group of GO bondholders sought to intervene in the BNYM action, arguing that pledged sales tax funds belong to the Commonwealth and thus should be used to cover GO debt obligations pursuant to the Island’s Constitution.

The court ruled, “The members of the GO group are not COFINA creditors and have no direct claim to the escrowed funds.” Judge Swain found that the GO group lacked standing to assert its claims in the BNYM’s action.

In March, Governor Rosselló’s administration and the GO bondholder group issued a joint statement in which they announced that the government, even though it was not taking a “definitive position” on the matter, would seek a “prompt and expeditious resolution of the claims asserted by the GO bondholders regarding the constitutionality of COFINA.” 

The judge’s ruling is a setback for the Commonwealth and its legal strategy, commented one source. The government’s plan to tap into COFINA funds and redirect them to the Island’s coffers may be in jeopardy.

“The claim that the Commonwealth is entitled or required to apply the COFINA trust funds to payment of the Commonwealth’s obligations to GO bondholders is one of which the Commonwealth, as a debtor in a related PROMESA Title III proceeding has control,” the order adds.

The court also establishes that “the GO bondholder group’s asserted interest in the COFINA funds would exist only if the Commonwealth’s yet un-asserted claim on COFINA funds were successful.”

On May 5, Puerto Rico’s Financial Control Board filed for bankruptcy protection under Title III of PROMESA on behalf of COFINA, as it did with the Commonwealth. A mediation process is set to begin July 12 to address, among other issues, the Commonwealth’s dispute with COFINA bondholders.

DISCOVERY RULES SET ON EXPECTED PUERTO RICO GOVERNMENT AND COFINA CLASH

After holding a hearing in Boston on July 5, U.S. Magistrate Judge Judith Dein, who was appointed to assist Judge Swain with Puerto Rico’s Title III cases, set the rules for discovery on the Commonwealth Government and COFINA dispute. The Commonwealth had opposed the COFINA creditors’ discovery petition, as it believed it was too broad and would not help solve the merits of the controversy.

By today, July 7, government officials and COFINA senior creditors must agree on search terms “aimed at identifying documents in the possession of the government that concern proposed changes to the use of COFINA dedicated sales tax revenues,” Judge Dein’s order reads. If disputes over the discovery process remain by July 12, parties will notify the court so the court can promptly solve these issues. As for the discovery time period, it will span from Feb. 15 to present. Documents to be produced include “public statements to third parties,” as well as electronically stored information in computers and cellphones.

If the Commonwealth Government refuses to produce documents citing such privileges as deliberative process and attorney client privilege, it must explain to the court why it is withholding them.

Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.