Objections abound on proposed Puerto Rico Disclosure Statement

Parties have filed nearly 30 objections to the Puerto Rico Oversight Board’s proposed Disclosure Statement for its central government debt Plan of Adjustment, with a key complaint coming from the Puerto Rico government, which said it will not authorize new bonds if pensions are cut.

The parties had until 5 p.m. on Tuesday to file their objections, though a few asked the court to accept their submissions made as late as Thursday. Submissions were made to the Puerto Rico bankruptcy court, the United States District Court for Puerto Rico. The Disclosure Statement Hearing is scheduled for 9:30 a.m. July 13.

The disclosure statement, which the Oversight Board submitted to the court on May 11, explains the terms and conditions of the Puerto Rico central government debt restructuring to the bondholders, pensioners, and other creditors who will vote on the debt restructuring. Bankruptcy Judge Laura Taylor Swain said she will not submit the statement until parties made a sincere effort to compromise on the disclosure statement.

The parties will have until 5 p.m. Atlantic Standard Time on June 28 to file responses to the objections that have been filed.

In its filing, Puerto Rico’s Fiscal Agency and Financial Advisory Authority said Puerto Rico’s legislature will not pass the legislation for new bonds needed by the plan of adjustment if the plan has a pension cut. FAFAA said the Disclosure Statement does not explain how the board would handle this situation.

Otherparties submitting objections were bond insurer Ambac Assurance, bond insurer Financial Guaranty Insurance Company, the Official Committee of Unsecured Creditors, Suiza Dairy Corporation, and AmeriNational Community Services LLC (servicer for the Government Development Bank Debt Recovery Authority) and the Cantor-Klatz Collateral Monitor (collateral monitor for the GDB DRA).

“By far the biggest hurdle for the Title lll court is the objection of the Puerto Rico government,” Long said.

PROMESA provides no authority for the court or the Oversight Board to issue new debt and the government has said they will not pass enabling legislation for new bonds if there are pension cuts, she said.

“The court therefore asked the mediation team to certify that the holdout parties have made ‘best efforts’ to reach consensus before the July 13 disclosure statement hearing or the court would not approve the disclosure statement. In my opinion it will be very difficult to reach consensus unless the [Oversight Board] drops the pension cuts and agrees to pay the unsecureds, Ambac and FGIC much more,” Long said.

The current Plan of Adjustment settles the claims of general obligation/Public Building Authority bondholders; the Retirees Committee; American Federation of State, County, and Municipal Employees, Service Employees International Union; Assured Guaranty, and National Public Finance Guarantee, noted Puerto Rico Clearinghouse Principal Cate Long. “This represents a substantial proportion of the commonwealth’s claims.”

Long said the disclosure statement is “nearly impossible” for a retail bondholder or retiree to understand as the Oversight Board did not “write it to be comprehensible,” Long said. “The statutory threshold is only that it provides ‘adequate information’ for an average investor to understand. The Title lll court was exceptionally lenient on this point in the [Puerto Rico Sales Tax Finance Corp.] COFINA Title lll proceeding and would likely be here too. The court is concerned that significant creditors of the commonwealth object — primarily the Puerto Rico government, Ambac, FGIC, US Bank as Public Finance Corporation trustee, and the Unsecured Creditors Committee.

“The plan is patently unfair to unsecured creditors who rank pari passu (in equal rank) with retirees. Retirees are slated to receive 92 to 100% of their pensions but the FOMB wants to pay the unsecureds less than 5% of their claim.

“Ambac and FGIC have a statutory right in Puerto Rico Oversight, Management, and Economic Stability Act section 407 to receive the full amount of their claim for their revenue bond holdings (prohibition against intercreditor transfers) after the bankruptcy stay is lifted and will litigate to get better recoveries,” Long noted.

“They stated in their objection that ‘some creditors,’ presumably themselves, would seek a stay at the First Circuit [Appeals Court] for plan confirmation which would likely halt the effective date of the plan which means they couldn’t issue new bonds etc.,” she said.

The Puerto Rico Oversight Board submitted its most recent proposed Disclosure Statement to the court on May 11. It is a 2,239-page pdf document available as Docket 16,741 in Case 17-03283-LTS.