The Oversight Board (semisquare-x3)
The Oversight Board (GFR Media)

The Oversight Board is hastily working for a confirmation of the Sales Tax Financing Corporation (Cofina, Spanish acronym) adjustment plan, and does not rule out imposing a restructuring on central government's creditors, in case negotiations do not advance in the mediation process set by court.

During Title III cases hearing held in the U.S. District Court in Puerto Rico, the Board´s main legal advisor, Martin Bienenstock, revealed that the future of Puerto Rico regarding debt renegotiation and also its creditors will be more clear between March and April. 

Bienenstock explained that the Board plans to resume negotiations to restructure other government obligations early in 2019. He also revealed that if, during the mediation sessions with bondholders and other central government creditors, they do not reach an understanding in economic terms, then there will be an adjustment plan for creditors, known as "cramdown".

Noting that the renegotiation process "is not a simple issue," Bienenstock explained to Judge Laura Taylor Swain that there seems to be some controversies with the Puerto Rico Public Buildings Authority (AEP, Spanish acronym) debt, as well as other matters related to the report prepared by the investigative firm Kobre & Kim on the reasons for the island´s financial collapse that could avert a consensual agreement.

In the case of the AEP, Bienenstock, also a Proskauer Rose partner, pointed out that there are questions on whether the rent that this public corporation charges to other government agencies constitutes, in effect, a lease under Section 365 of US Bankruptcy Code.

The debt issued by the AEP is considered constitutional, since it is payable with income generated by the state itself. As a result, this obligation would affect the payment capacity of the central government to respond to other obligations, such as General Obligations, which payment is established in the Constitution, and pensions.

On the Kobre & Kim report, Bienenstock seemed to leave the door open to possible claims from the Board.Last month, and after creating a a Special Claims Committee to investigate potential claims against those that may have contributed with the financial collapse of Puerto Rico, the Board announced the selection of Brown Rudnick firm to assist in such matters. According to Bienenstock, the fiscal entity is interested in filing the central government plan based on an understanding with creditors and as soon as possible.

But, immediately after, he acknowledged that this could be unfeasible, because at present, "there is no reason to bet" on an improvement in the island´s economic prospects, unless Puerto Rico adopts drastic changes, such as repealing Law 80 on unjust dismissal.

This is the first time that, in Title III proceedings, the Board, through its main legal advisor, made a direct reference to the imposition of an adjustment plan to government's creditors, a mechanism provided in PROMESA and that would enable to modify the island´s debt even when its holders object to the terms proposed. 

Swain warned Bienenstock not to be surprised if she asks him for another report on the status of negotiations in January, noting that it is important for the people of Puerto Rico to be informed of the debt renegotiation process and stressing that the issue also generates uncertainty and concern in thousands of people.

Cofina pact on the way

In addition to the renegotiation of obligations tied to the central government, Bienenstock highlighted the recent renegotiation of the Government Development Bank (GDB) debt and the adjustment of Cofina's obligations, which should take shape in January.

In this case, Brian S. Rose, also lawyer of the Board and member of Proskauer Rose, told Swain that the voting process on the Cofina adjustment plan was already in progress.

Rosen explained to the judge that the Board was working on Cofina's creditors' claims, because, although that agency only issued about $ 17 billion in bonds, the claims registry pointed to a balance of about $ 10 "trillions".

According to the lawyer, such an astronomical figure responded to duplicate claims that occurred when individuals and entities filed petitions that were already calculated in the claims filed, in the name of bondholders, by the Bank of New York Mellon (BNY Mellon), Cofina custodian bank.

Rosen seemed confident that, facing the confirmation hearing, Cofina's adjustment plan will have no detractors. This is because the Board is talking to BNY Mellon, as well as with the investment firm Whitebox Advisors and insurer Ambac Assurance about certain fees and payments associated with the transaction, in order to resolve the differences between the parties.

Likewise, Rosen said that the Official Committee of Retirees (COR, Spanish acronym), a group that partially objected to the plan for Cofina, withdrew its motion.

Initially, COR challenged the fact that Cofina's adjustment plan did not establish that, in the future, the debt issued by that entity will have to be calculated as part of the constitutional margin of Puerto Rico.

However, COR lawyer, A. Bennazar Zequeira, revealed yesterday that his client and the Board held multiple meetings and telephone conferences and the committee would submit a document in court to withdraw their objections.

Unless there are objections to the Cofina plan on or before January 2, Judge Swain could give way to Cofina's adjustment plan after a special hearing on January 16.

About 15 days later, they would resume the Title III general hearing. 

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