Judge Laura Taylor Swain asked the Unsecured Creditors Committee (UCC) and the Oversight Board for improvements in the language of notices to be sent to thousands of General Obligations (GO) bondholders, in order to capture their attention and warn them about the possibility of losing a part or even everything they lent to the government.
Swain stressed that it is necessary to warn creditors that their rights are at risk. And also noted that the same language should be included in the Spanish version of the document. The request of the judge who presides over PROMESA Title III cases came yesterday, when she said she would to give way to a joint motion filed by the UCC and the Board to set the procedures for that court to decide on the alleged annulment of $6,04 billion in bond debt –GOs- which are backed by the full faith and credit of Puerto Rico.
Yesterday, although lawyers representing the Ad Hoc-GO and Assured Guaranty told Swain that attempts by the UCC and the Board will derail the secret negotiations conducted by the mediation team, Swain approved the procedures to address the controversy. However, she said she wanted to listen to objectors to have a revised order.
If the motion filed by the UCC and the Board -to annul four bond issuances between 2012 and 2016- prevails that might partially or totally nullify about 36 percent of the Puerto Rican constitutional debt.
On January 14, the Board´s Special Claims Committee and the UCC surprised those groups following the Puerto Rico bankruptcy case when they filed an objection stating that they island lost capacity to issue constitutional debt in 2012, since Puerto Rico would not have calculated the debt of the Public Buildings Authority (PBA) and for not complying with the constitutional provision to operate with balance budgets. “more than $6 billion of Invalid Debt as exceeding the debt limit in Article VI, section 2 of Puerto Rico’s Constitution.”
Thus, the Board and the UCC objected creditors claims related to GOs alleged to be null.
Although the Board seemed to be leading the attempt to challenge the constitutional debt, yesterday it was Luc Despins, a lawyer for the UCC and partner at Paul Hastings, who took the lead in answering Swain´s questions and rebutting objections.
Among other things, Swain´s order will set the time for the parties to answer motions or objections and creates a mechanism to address claims in a consolidated manner instead of the procedure under Section 3007 of the Bankruptcy Code.
There will also be a mechanism for those creditors willing to join the process to do it after submitting proof of the debt.
For Mark T. Stancil, a lawyer for the Ad Hoc-GO group and a partner at Robbins Russell, the UCC and the Board are only seeking to find out which creditors will sit at the negotiating table and which creditors will confront them and said that the proposal would give different treatment to creditors with the same claims.
Stancil also objected the Board when he said that the move by the fiscal entity and the UCC would complicate the negotiations through the mediation process ordered by the court. Minutes before, the Board had said that conversations with creditors continued and reported progress on the negotiations with the Electric Power Authority (PREPA)
Mark Ellenberg, a lawyer for Assured, agreed with Stancil. He said the objection filed by the Board and the UCC was a wrong path and described it as “a stone” thrown to creditors. According to Assured, the proposal would put them in red because they insure about $196 million in PREPA debt and more than $1,3 billion in GO bonds.
Swain also approved a motion by the Board to dismiss certain Cofina claims.
After the hearing, La Fortaleza issued a press release stating that the court had endorsed Cofina adjustment plan, which was not discussed and there were no references to it in the Title III cases files.
Just a few minutes later, Christian Sobrino, director of the Sales Tax Financing Corporation (Cofina) denied the information in the press release issued while municipal markets were still open. In that press release, the official was quoted celebrating the judicial decision that, by press time, did not happen.