Starting today, Puerto Rico’s future goes to the federal justice system, when that branch of government starts receiving the multiple suits from bondholders and other creditors of the Island’s Government.
After two weeks of failed talks between the Fiscal Agency and Financial Advisory Authority (FAFAA), the Oversight Board (OB) and approximately a hundred advisers and bondholders, several groups of creditors are about to go to court to demand all kinds of remedies against the Island, according to four separate sources of El Nuevo Día.
According to sources of this daily, among the first creditors to head for court starting today are several hedge funds holding General Obligations’ bonds, the large institutional funds who hold various types of loans to the Island, as well as the main bondholders of the Puerto Rico Sales Tax Financing Corporation (Cofina).
“Filing a suit doesn’t mean we’ll turn into those people and groups that we’ve criticized. We will remain the Government’s constructive partners as we have for the past 18 months,” said to El Nuevo Día, Daniel Salinas, from Quinn Emanuel, when confirming to this daily he was about to file a petition early this morning on behalf of the Coalition of Main Bondholders of the Puerto Rico Sales Tax Financing Corporation (Cofina).
“This was no easy decision,” added Salinas assuring that his principals have tried for months to reach an agreement with Puerto Rico, both with the administrations of Alejandro García Padilla and Ricardo Rosselló Nevares.
Salinas and his colleagues at Quinn Emanuel are but a few in a plethora of lawyers and financial advisers who, according to sources of this daily, will say in court starting today what they unsuccessfully argued with the FAFAA and the OB in recent months, specially, during the mediation process that was led by former bankruptcy judge Allan L. Gropper, which ended last Friday.
Last night, after both Cofina and General Obligations (Ad Hoc-GO) bondholders had publicly expressed over the weekend their rejection of the Government’s proposal, FAFAA executive director, Gerardo Portela Franco, confirmed that a last-ditch effort with creditors had also failed.
“Although we have yet to reach an agreement there, our lines of communication remain open and we welcome any chance at talks,” said Portela in a written statement.
In short, as revealed by El Nuevo Día over a week ago, the offer made by FAFAA and released at midnight last Friday, includes a cut of between $0.50 and $0.60 cents to both groups of bondholders.
According to Portela, the Government has negotiated in “good faith” with its creditors and, in the future, they expect to reach agreements with other groups of bondholders, but he also said that “all options remain on the table.”
On the offensive in the streets and in court
From the perspective of creditors, nevertheless, neither the Government nor FAFAA have done enough. That is why, yesterday, several law firms in Puerto Rico and New York were busy fine tuning the legal strategies.
For the past two weeks, both the Cofina and General Obligations (Ad Hoc-GO) bondholders submitted several proposals to FAFAA which went unanswered and which add to the dozen offers and counteroffers exchanged the administration of García Padilla which also ended in nothing.
“The task is to prepare for a tittle III,” said one of the sources linked to the Island’s creditors, who indicated that counsel for various bondholder groups have spent weeks preparing for a bankruptcy scenario. This, over the reluctance by the OB to make changes to the fiscal plan to add more money to the pay for public debt.
Yesterday, the last day of the freeze against litigations that Puerto Rico has enjoyed for eight months since the inception of the OB, the territory’s history was being written on two fronts.
On social media, the Internet, radio and television stations, the story told was that thousands of workers took over the streets of Puerto Rico’s financial district for a few hours to repudiate the austerity program pushed by the OB and said it would lead them to poverty. Likewise, armed with stones, barriers, and wooden shields, dozens of protesters turned the protest into an opportunity to destroy private property.
In silence, and away from the cameras or microphones, in New York and Puerto Rico, lawyers polished their briefs, petitions for a final ruling, injunction and mandamus with which, starting today, possibly, they will seek to alter the operations of a government that has failed to pay them a cent for an entire year.
Meanwhile, four sources consulted by El Nuevo Día said that the members of the OB have yet to define the course to be followed starting today and there are disagreements between them and, in turn, between the Board and the Government.
According to PROMESA, the entity that controls public finances has the power to demand the protections of tittle III, but that would be unfeasible, unless the administration of Rosselló Nevares makes a petition in that sense.
Ready for the suits
“Despite today’s (yesterday) expiration of the freeze on litigations, our interest is still to reach a negotiated agreement,” said to El Nuevo Día, Puerto Rico’s representative before the OB, Elías Sánchez Sifonte.
“They (the bondholders) are entitled to that and the court will hear any controversies filed,” added Sánchez Sifonte when El Nuevo Día asked whether the Rosselló Nevares administration has taken any measures for what could amount to dozens of claims against it.
“The Government will respond and answer to each proposal made. The governor has said he doesn’t rule out any mechanism at his disposal,” added Sánchez Sifonte when asked whether Puerto Rico will petition the OB’s authorization to invoke Tittle III of PROMESA.
Cofina bondholders speak
While both the Government and the OB have not made a decision, the Cofina Mutual Fund Investors’ Group seemed to have made its own.
“The Cofina mutual funds’ group offered restructuring proposals, both global and specific to Cofina, which were essentially ignored by Puerto Rico and the Board in spite of the fact that the proposals offered $4.2 billion in Cofina debt service relief and over $15 billion of relief to the global debt service, respectively,” said last night restructuring advisor Stephen Spencer, director of Houlihan Lokey.
Spencer, who is also a participant in the negotiations with the Puerto Rico Electric Power Authority (PREPA), advises three main institutional Puerto Rico bondholders, who even hold other Government loans: Oppenheimer Funds, Franklin Templeton Investments, and Santander Asset Managers.
To invalidate the fiscal plan
“There were, on the part of Puerto Rico’s largest investors, efforts to reach a negotiated restructuring agreement which was simply not reciprocated by either the government of Puerto Rico or the Board,” Spencer reiterated.
“I feel defrauded. I felt disappointed and defrauded by the last administration and feel the same way now,” said Puerto Rican investor José Rodríguez, who heads the complaint filed the Cofina Coalition.
According to Rodríguez, a businessman who invested his savings in Cofina bonds to make his retirement income, if Puerto Rico defaults on what was contractually agreed over a decade ago with him and his family, he could loose 90% of his livelihood.
“Today (yesterday) we are Venezuela,” said Rodriguez when stating his sorrow, both for the street protests that took place in the Island –and which reminded him of the recent protests in the South American country- as the future that awaits him and thousands of Puerto Ricans as a result of the Government’s default.
In the suit that Rodríguez and over a dozen investment funds would file today, the plaintiffs will seek to protect the structure of Cofina. It sets forth that revenues from the Sales and Use Tax (IVU, by its Spanish acronym) belong to that entity and, therefore, to its creditors.
To that end, based on a dozen specific remedies, the intention of the Coalition’s suit is to modify the fiscal plan to recognize that IVU revenues, according to PROMESA, cannot be diverted to another government entity.
Instead of keeping IVU revenues segmented, the fiscal plan calls for including that item as part of the collections pool from which service of the government’s debt and all the creditors would be paid, Salinas explained.
Likewise, the Coalition’s suit denounces the existence of a conflict of interest and breach of fiduciary duty by Government officials and Cofina directors. That, because even while other groups of creditors have attacked the structure of Cofina, to date, neither the FAFAA, nor the Cofina directors, who are also members of the Government Development Bank (GDB), have taken any action to defend the structure created by law.
For his part, Salinas made clear that, while they will go to court, the Coalition is willing to reach an agreement with the government. “That was true before, it is true now, it is true once the suit is filed, and will remain so (even) if the Government decides to use the tools provided in PROMESA, including tittle III,” said Salinas.
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