Puerto Rico board considers alternate paths to bankruptcy passage


A bankruptcy judge conditionally approved a Disclosure Statement on Puerto Rico’s $35 billion debt restructuring proposal, sending it to debt holder voters later this year.

The Puerto Rico Oversight Board told the bankruptcy court during the Thursday hearing that the board was considering two alternative approaches to passing its Plan of Adjustment after Puerto Rico lawmakers have repeatedly said they would not authorize new bonds that are a key to getting a debt deal done.

The board has argued it could approve the Plan of Adjustment without the local government approving new bonds, but Board Attorney Martin Bienenstock said the board may also be able to rely on a 1942 Puerto Rico law that has been used over the years to justify bond refundings.

The Plan of Adjustment is a restructuring of the debt and not a refunding of it. However, the board attorneys are looking at whether the wording of the law and its use for refundings may allow its use in the restructuring.

Puerto Rico Oversight Board Attorney Martin Bienenstock said the board was exploring whether to use a 1942 law to legally justify restructured GO and PBA bonds.

Swain had asked the board to provide “Plan B” alternatives in the Disclosure Statement to debt deal voters, telling them what would happen if the local legislature voted against the plan of adjustment’s new bonds. In the plan’s current form, it is possible both the Senate and House of Representatives will vote unanimously against approving new bonds. Parties are arguing whether these votes are essential to issue valid bonds.

Bienenstock said the revised Disclosure Statement goes into some Plan B scenarios, including language that the bonds could be issued under the authority of the 1942 Puerto Rico law.

Creditors who have signed on to the General Obligation/Public Building Authority Plan Support Agreement want to know if the 1942 law is adequate to support the new bonds, Bienenstock said.

Consideration of how to justify the new bonds introduces “game theory” and “intrigue,” the lawyer said. There are scenarios where the creditors and the board would like to rely on the 1942 law and there are scenarios where they would not.

Bienenstock said the board would tell the bondholders before they voted on the plan of adjustment whether the board believes the plan’s new bonds can rely on the 1942 law.

“We hope to strike a deal with the [Puerto Rico] government, but it is not essential to ultimate confirmation, we believe,” Bienenstock said. He said he wanted the GO and PBA PSA creditors to support the agreement. There would be risks to both the board and the creditors if they withdrew. The board will look at what outside law firms say about 1942 law’s coverage of new bonds and at whether the municipal market would accept the bonds, he said.

If the PSA creditors withdrew there would have to be a “cram down,” Bienenstock said. This is when a bankruptcy plan is passed with certain creditor classes voting against it. If this happens, the board may have to ask for a postponement of the confirmation hearing, currently scheduled for the fourth quarter of the year. In that case, the board would have to ask for the plan of adjustment to be modified, he said.

Puerto Rico Fiscal Agency and Financial Advisory Authority attorney John Rapisardi, representing the position of Gov. Pedro Pierluisi, asked Swain for permission to speak despite not being on the agenda. Swain OK’d it and Rapisardi said the board’s arguments that the plan of adjustment was not dependent on local legislative approval were “novel.”

Rapisardi said the board seems to have not made up its mind whether to ignore local law or to “cherry-pick” it.

The current proposed central government plan of adjustment is built on earlier passed Government Development Bank and Puerto Rico Sales Tax Finance Corp. (COFINA) restructuring deals, which had legislative backing, Rapisardi said. He said the board should continue to work with the local government on the issue of pension cuts, which are currently part of the central government plan of adjustment. He said they are not necessary.

Swain said the board and local government should continue to engage in good faith discussions.

Board Attorney Brian Rosen said recent deals on the Puerto Rico Infrastructure and Finance Authority rum tax bonds and Convention Center District Authority bonds may be approved through Title VI of the Puerto Rico Oversight, Management and Economic Stability Act. Title VI provides an alternate path for deal approvals to the path found in Title III, which is like that found in municipal Chapter 9 bankruptcies.

Separately, Swain said she would consider advancing a hearing to consider a retail committee to address concerns with a solicitation of retail holders after Puerto Rico bondholder and New York City attorney Peter Hein said he was concerned by the release Wednesday on the Municipal Securities Rulemaking Board’s EMMA web site of a solicitation of retail GO and PBA bondholders. The release asked retail investors to join the plan support agreement to get the plan support restriction fee, which has been offered to institutional holders supporting the GO/PBA Plan Support Agreement.

Hein said the solicitation has a link to the proposed Disclosure Statement, but this statement had not yet been finalized. He said the solicitation claims it does not bind those who agree to its terms to supporting the plan but that in fact it does contractually bind them to do so.

He complained the 5 p.m. Aug. 13 solicitation deadline is too soon. He said Swain had scheduled a hearing to consider his proposal for a committee to represent retail holders for Aug. 18. Swain should address the committee idea before the solicitation deadline.

Hein asked the hearing on his retail committee proposal to be advanced to the Aug. 4 omnibus hearing. Swain said she would respond to this proposal shortly.

At the end of the hearing Swain said, “The court will enter appropriate orders approving the Disclosure Statement and the related procedures and granting the confirmation and discovery motions upon the filing of a further revised Disclosure Statement satisfactorily addressing the issues discussed earlier and orders reflecting the revisions that have been directed and undertaken.” Swain told the board attorneys to promptly send a proposed final version to her.

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