Judge Laura Taylor Swain. (GFR Media) (semisquare-x3)
Judge Laura Taylor Swain. (GFR Media)

Yesterday, the Oversight Board scored an important victory in renegotiating the island's debt when Judge Laura Taylor Swain concluded that the federal entity offered sufficient information to Cofina bondholders, in order to seek approval to cut 28 percent of about $ 16.7 billion in bonds.

After a 90-minute hearing and after acknowledging that she had before her "serious" issues regarding the merits of the agreement, Swain noted that her ruling was limited to recognizing the Board’s efforts on preparing and circulating Cofina disclosure statement to the bondholders, a 621-page document  that details how the government's main debt will be negotiated.

Swain indicated that she had considered the Board´s presentations, but also all the letters some bondholders sent her and opposing motions and arguments filed by several parties in Title III cases. Among those, the Bank of New York Mellon, custodian bank of Cofina; the Official Committee of Retirees (COR, Spanish acronym), the Lehman Brothers successor company; four savings and credit cooperatives in Puerto Rico and several unions.

Disparity between Cofina senior and subordinate bondholders and how the Sales and Use tax (SUT) portion will be distributed were among the arguments submitted to Swain.

In the courtroom of New York Southern District and before wishing a happy Thanksgiving, Swain said that those were serious issues that could reflect the way in which the plan (Cofina adjustment) would paint a very painful picture for many people, but that the adequacy of the plan or its legality was not before the consideration of the court yesterday. 

A favorable step

After learning of Swain's ruling, the Board´s Executive Director Natalie Jaresko said that the decision of the court "is another favorable step towards our goal of restructuring Puerto Rico's debt in a sustainable manner".

"The Board will continue its efforts to reach consensual agreements with the creditors of Puerto Rico, as it furthers its work to help the island´s government achieve fiscal health," she added, noting that the disclosure statement complies with section 1125 of the Bankruptcy Code and with PROMESA.

Swain's decision constitutes a milestone in the Puerto Rico debt restructuring process that began in mid-2016, when the US Congress passed PROMESA.

It´s been more than two years since Congress passed PROMESA that created the Board, the entity with powers over the elected government of the island, and commissioned to renegotiate the public debt and seek fiscal balance.

Judge Swain's decision implies that after a mediation process promoted by her and, within a period of about 17 months, Puerto Rico will bring to consultation the first debt adjustment plan under PROMESA Title III. 

Meanwhile, Christian Sobrino Vega, executive director of the Puerto Rico Fiscal Agency & Financial Advisory Authority (FAFAA, Spanish acronym), said this week that if Swain approved the disclosure of Cofina as it happened yesterday, the process to consult bondholders could start on November 30.

Senior bondholders celebrate

"We think it is time to vote," said Susheel Kirpalani during the hearing, principal legal adviser to Cofina Senior Coalition and a partner at law firm Quinn Emanuel Urquhart & Sullivan.

According to Kirpalani, the agreement negotiated by his firm, as well as Paul Hastings (representing the Unsecured Creditors Committee UCC), Proskauer Rose (who advises the Board) and Willkie Farr & Gallagher (who advises Cofina agent Bettina M. Whyte), constructively contributes to the recovery of the island, so it is "a significant step that should not be minimized".

The negotiation between the Board, the government and bondholders contemplates that the 5.5 percent portion of the SUT will be almost equally divided between Cofina and the General Fund.

The item that will remain in Cofina will be the source of repayment for those bondholders and, in that group, the creditors that Kirpalani represents will collect almost 94 cents. In contrast, bondholders like Lawrence Dvors, the only individual bondholder who had a turn yesterday before Swain and who represented himself voluntarily, will receive about 54 cents of what they lent to Puerto Rico.

Kirpalani stressed that the agreement enables the General Fund to access SUT revenues that previously were intended for Cofina and that the deal, that could be included among the largest municipal bankruptcy processes, will help Puerto Rico regain access to the investment market.

While Kirpalani praised the Cofina process, Governor Ricardo Rosselló Nevares did the same at a press conference in Canóvanas. There he spoke of the agreement discussed in New York after announcing the construction of a new aqueduct system in the ‘Valle Hill’ community.

"This would be the first time in history that the debt is reduced instead of increasing," Rosselló Nevares said, noting that the Cofina agreement would reduce the debt service by $ 17 billion over the next decades.

Government documents suggest that Puerto Rico's debt has not shown any increases since 2014, when the government borrowed money for the last time.

Rosselló said that there are some projections towards 2050 with dismal numbers on the population of Puerto Rico. “All these projections assume that the population will remain the same. If we are going to allow things to remain the same, we will not build much. Our bet is that things will change,"  Rosselló Nevares remarked.

Objections to the agreement

Rosselló Nevares did not directly address the criticisms to the Cofina agreement.

Since the announcement of a PSA in September to renegotiate Cofina debt, there have been detractors.

Antonio Weiss, former counselor to the Treasury and architect of PROMESA law, for example, has argued that the cut is not enough for Puerto Rico’s economy and that this represents a short-term relief, but once renegotiated bonds have to be paid in about two decades.

Last week, Nobel Prize winning economist Joseph Stiglitz wrote in Project Syndicate that, even if the Cofina agreement is approved, it is unlikely that the island's economy will get back on its feet and that there will be no money left to pay other bondholders.

Meanwhile, the Citizen Front for the Debt Audit (FCAD, Spanish acronym) asked Judge Swain to place the needs of the people of Puerto Rico, and the burden that such pact will represent for present and future generations, above any private interest.

The organization sent Swain a letter signed by 21,000 people.

Yesterday, while the Board and the government assured that the deal will favor Puerto Rico, the federal entity acknowledged, in court, an error in pension calculations paid from the General Fund, the second most important debt Puerto Rico faces, and whose final balance is still unknown.

However, according to the Board, despite the fact that pension payments are "underestimated" in the fiscal plan, this should not affect the negotiations on Cofina.

$135 million to negotiate

Although there were many doubts regarding the agreement yesterday, the settlement and Swain's endorsement to the disclosure statement point toward several certainties. This, once the Bank of New York Mellon, the credit unions and also the Lehman Brothers withdrew their objections to the disclosure statement.

According to lawyer Brian S. Rosen, a partner at Proskauer Rose, attorneys' fees for Title III process and the negotiation on Cofina are around $ 135 million, a figure that Swain immediately asked if it would be reviewed.

Similarly, the Cofina agreement states that the lawyers and funds that participated in the negotiation will receive $ 332 million in compensation for achieving the agreement and, above all, for not objecting to it on January 16, 2019. That is the date in which Swain will see the merits of the deal.

On the other hand, it was also clear that the Board will object to 3,000 claims of Cofina bondholders, because they understand that there is duplicity, and that in the coming days they will make several amendments to the disclosure statement, such as including a notice in Spanish which was not included in the initial disclosure.

An "injustice"

Another issue that seemed indisputable is the perception of injustice that the agreement represents for those who trusted their money to Puerto Rico.

"It is difficult to understand that an injustice like this takesplace,"  Dvors told Swain.

The man, who lives in New Jersey, contributed the arguments of another South Carolina bondholder who objects to the agreement, Stephen Mangiaracina.

According to Dvors, the New York Mellon Bank -the custodian bank- has not done anything to defend his interests, and the Board did not fulfill its duty when requesting a bankruptcy remedy in Cofina, when there was never any problem in paying the bondholders. 

Ricardo Cortés Chico collaborated with this story.

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