GDB Debt Deal Faces Chal­lenges

The Bond Buyer - - Front Page - By ROBERT Slavin

The Gov­ern­ment De­vel­op­ment Bank for Puerto Rico debt re­struc­tur­ing deal faces bur­geon­ing court chal­lenges.

Bond­hold­ers are vot­ing on the deal un­til Sept. 12 and Puerto Rico’s gov­ern­ment has in­di­cated con­fi­dence that many sup­port the deal.

But 13 par­ties have filed ei­ther court chal­lenges or no­tices of in­tent to chal­lenge the deal since Puerto Rico for­mally filed the deal in court on Aug. 10.

Bond­holder votes will be di­vided into those who hold Puerto Rico guar­an­teed GDB bonds and those who hold GDB bonds with­out the guar­an­tee. For the deal to pass, in each bond class hold­ers of at least a ma­jor­ity of the par value out­stand­ing must vote in fa­vor and hold­ers of at least two-thirds of the par value voted on must vote in fa­vor.

The GDB and the Puerto Rico Fis­cal Agency and Fi­nan­cial Ad­vi­sory Au­thor­ity filed the pro­posed re­struc­tur­ing in the United

Stated Dis­trict Court for the Puerto Rico Dis­trict. Judge Laura Tay­lor Swain is hear­ing the case. She is also han­dling the Puerto Rico en­ti­ties in Ti­tle III bank­ruptcy.

Un­like those other en­ti­ties, the GDB deal is op­er­at­ing un­der Ti­tle VI of the Puerto Rico Over­sight, Man­age­ment and Eco­nomic Sta­bil­ity Act. This PROMESA sec­tion over­sees ne­go­ti­ated deals on which cred­i­tors ul­ti­mately vote.

The GDB has about $4.2 bil­lion in bond debt out­stand­ing.

Among the par­ties fil­ing ob­jec­tions or in­ten­tions to ob­ject are the United States gov­ern­ment, the Of­fi­cial Com­mit­tee of Un­se­cured Cred­i­tors, bond in­surer Na­tional Pub­lic Fi­nance Guar­an­tee, and Siemens Trans­porta­tion Part­ner­ship Puerto Rico.

The U.S. gov­ern­ment says that since the pro­posed or­der hasn’t yet been pre­sented, it filed a mo­tion to pre­serve its rights over its de­posits at the GDB.

NPFG filed out of a con­cern about how the GDB han­dled a $15 mil­lion trust fund. It also filed a sep­a­rate mo­tion to “re­serve rights” be­cause it in­sures Puerto Rico Elec­tric Power Au­thor­ity bonds. The au­thor­ity has $114 mil­lion on de­posit at the GDB that the deal would af­fect, NPFG stated.

Sev­eral of the other fil­ings are no­tices of in­tent to ob­ject and don’t spec­ify the na­ture of their com­plaint.

The Un­se­cured Cred­i­tors Com­mit­tee made at least 10 le­gal chal­lenges to the GDB debt deal.

U.S. mu­nic­i­pal bank­ruptcy ex­pert James Spi­otto said one thing that con­cerns the UCC and may con­cern Swain is that while the deal af­fects mu­nic­i­pal­i­ties, they will not vote on it.

The mu­nic­i­pal­i­ties have de­posits at the bank.

In the deal the amount of each mu­nic­i­pal­ity’s de­posits at the GDB would be cred­ited against the amount the mu­nic­i­pal­ity owed the bank in loans. This is called the mu­nic­i­pal setoff. Any ad­di­tional de­posits re­main­ing would be re­struc­tured at 55 cents on the dol­lar and treated as a bond claim.

Ad­di­tion­ally, a spe­cial ad­di­tional tax held for mu­nic­i­pal­i­ties held at the GDB will be paid in cash at 55 cents on the dol­lar.

There is a ques­tion whether the GDB debt deal “af­fects the rights of oth­ers that should not be im­paired,” Spi­otto said. “The prob­lem is that they might be us­ing money that is not theirs to use,” said Spi­otto, manag­ing di­rec­tor at Chap­man Strate­gic Ad­vi­sors. that the court de­ter­mines that the Ti­tle III debtors’ [i.e. Puerto Rico gov­ern­ment and Puerto Rico gov­ern­ment au­thor­i­ties’] de­posits are not held in trust or in a fidu­ciary ca­pac­ity by GDB, then the pro­posed treat­ment of the Ti­tle III debtors’ de­posits with GDB vi­o­lates the statu­tory re­quire­ments for pools of bond claims in PROMESA.”

How­ever, the UCC says that Puerto Rico and Puerto Rico au­thor­ity cash was in fact held in trust by the GDB and didn’t be­long to it. Thus the GDB has no right to con­fis­cate it to pay cer­tain of its cred­i­tors at the ex­pense of Puerto Rico gov­ern­ment en­ti­ties cur­rently in Ti­tle III bank­ruptcy.

While there have been many chal­lenges filed in the Ti­tle VI case in the three weeks since it started, it re­mains to be seen how much flex­i­bil­ity Swain has to ad­dress them.

PROMESA says that Swain must re­spect the Over­sight Board-ap­proved fis­cal plan. How­ever, it also says de­spite

The Gov­ern­ment De­vel­op­ment Bank of Puerto Rico, which has about $4.2 bil­lion of bond debt out­stand­ing, is fac­ing 13 chal­lenges or no­tices of in­tent to chal­lenge its debt re­struc­tur­ing deal.

“They might be us­ing money that is not theirs to use,” said James Spi­otto.

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