PR’s GDB Deal Faces Court Test

The Bond Buyer - - Front Page - By roBert SlaviN

Puerto Rico’s un­se­cured cred­i­tors are seek­ing to de­rail the Gov­ern­ment De­vel­op­ment Bank debt deal by main­tain­ing the au­to­matic stay and by tak­ing over rep­re­sen­ta­tion of Puerto Rico’s author­i­ties in the case.

Since Aug. 22 the Of­fi­cial Com­mit­tee of the Un­se­cured Cred­i­tors, which rep­re­sents non-bond­hold­ing cred­i­tors of Puerto Rico’s gov­ern­ment and author­i­ties, have been seek­ing to main­tain the au­to­matic stay in the GDB Ti­tle VI bank­ruptcy case. Since then the GDB, the gov­ern­ment of Gov. Ri­cardo Ros­selló, and the Over­sight Board have filed ob­jec­tions to the com­mit­tee’s fil­ing and the com­mit­tee has re­sponded with its ar­gu­ments.

On Wed­nes­day Puerto Rico bank­ruptcy Judge Laura Tay­lor Swain will hear ar­gu­ments on whether the au­to­matic stay should be lifted, which could open the door to her ap­prov­ing the GDB debt deal. Swain will hear the ar­gu­ments as part of a gen­eral om­nibus hear­ing in Puerto Rico’s debt

bank­ruptcy.

The GDB had $4.2 bil­lion of debt out­stand­ing as of Fe­bru­ary 2017.

GDB bond­hold­ers are vot­ing on the pro­posed deal through Sept. 12 and the out­come of that vote will also play a role in whether the debt deal is ap­proved.

The com­mit­tee is say­ing that for­mer prom­i­nent GDB lead­ers are now lead­ers of the Puerto Rico Over­sight Board, Puerto Rico Fis­cal Agency and Fi­nan­cial Ad­vi­sory Au­thor­ity, FAFAA’s fi­nan­cial ad­vi­sor, and the Back­yard Bond­hold­ers group, which sup­port the deal. On Sept. 10 the com­mit­tee told Swain,

“If the pur­ported [GDB] Qual­i­fy­ing Mod­i­fi­ca­tion is ap­proved, the very peo­ple who or­ches­trated the GDB Re­struc­tur­ing will have suc­ceeded in re­leas­ing them­selves, GDB, and oth­ers of any li­a­bil­ity to the Ti­tle III Debtors re­lat­ing to GDB’s role in Puerto Rico’s fi­nan­cial cri­sis, in­clud­ing any li­a­bil­ity based on ‘un­known’ facts.”

The Puerto Rico Over­sight, Man­age­ment, and Eco­nomic Sta­bil­ity Act al­lows for a stay on the re­cov­ery of debts, called an “au­to­matic stay,” un­der cer­tain con­di­tions.

In its Aug. 22 fil­ing, the com­mit­tee called for the con­tin­u­a­tion of the au­to­matic stay for the GDB debt. This would ef­fec­tively post­pone or pre­vent the con­sum­ma­tion of the pro­posed GDB debt deal, also known as the Qual­i­fy­ing Mod­i­fi­ca­tion.

Among the com­mit­tee’s ar­gu­ments is that the trans­fer in the GDB deal of the Puerto Rico author­i­ties’ de­posits to the GDB is a vi­o­la­tion of the au­to­matic stay. The com­mit­tee says the deal would af­fect Ti­tle III debtors’ (i.e. Puerto Rico author­i­ties’) money in var­i­ous ways and thus is contrary to the au­to­mat­ics stay. The com­mit­tee said that what­ever the board’s wishes with re­gards to end­ing the stay, the court has dis­cre­tion on this is­sue.

For their part, the GDB and FAFAA ar­gued that sec­tions 303 and 305 of PROMESA gave them the right to op­er­ate freely of the com­mit­tee’s claims. They say that sec­tion 303 gives them (and not the board or the court) the right to make most gov­ern­ment de­ci­sions and these de­ci­sions in­clude whether the stay should be ex­tended or ended.

They say that sec­tion 304(i) of PROMESA said that Ti­tle III debtors can con­sent to Ti­tle VI mod­i­fi­ca­tions even if the au­to­matic stay would oth­er­wise ap­ply when it said that “noth­ing in this sec­tion shall pre­vent the holder of a claim from vot­ing on or con­sent­ing to a pro­posed mod­i­fi­ca­tion of such claim un­der sub­chap­ter VI of this chap­ter.”

In the Over­sight Board’s Aug. 31 fil­ing it made some of the same ar­gu­ments but added that the com­mit­tee lacked au­thor­ity to ob­ject to the GDB re­struc­tur­ing and stand­ing to ob­ject to breaches to the au­to­matic stay.

The board said that the stay pro­tects the debtors and its as­sets rather than the cred­i­tors. The board said the com­mit­tee rep­re­sents some of the cred­i­tors and thus the com­mit­tee lacks stand­ing. The board said that the gov­ern­ment author­i­ties don’t have pos­i­tive net claims against the GDB. And be­cause of this the board said it makes no sense for the board to gain rep­re­sen­ta­tion of the author­i­ties’ in­ter­ests (be­cause they have none) in the GDB bank­ruptcy.

In a Sept. 6 fil­ing the com­mit­tee re­sponded to the GDB, FAFAA, and the board by say­ing, “the GDB re­struc­tur­ing does not in­volve the ex­er­cise of the ‘gov­ern­men­tal and po­lit­i­cal pow­ers’ re­served to the com­mon­wealth un­der sec­tion 303 [of PROMESA] or pro­tected from court in­ter­fer­ence un­der sec­tion 305.”

The com­mit­tee con­tin­ued, “the Over­sight Board’s as­ser­tion that the Ti­tle III debtors lack net claims against GDB is ir­rel­e­vant, un­sup­ported, and shows only that the Over­sight Board is hope­lessly con­flicted and un­in­ter­ested in act­ing as a true fidu­ciary for the Ti­tle III debtors.”

Whether the Ti­tle III (Puerto Rico au­thor­ity) debtors have net claims against the GDB is ir­rel­e­vant, the com­mit­tee ar­gued and, fur­ther­more, hasn’t yet been prop­erly de­ter­mined.

Fi­nally, the com­mit­tee said that, “Abun­dant au­thor­ity es­tab­lishes that the au­to­matic stay pro­tects cred­i­tors as well as debtors, and here the com­mit­tee clearly has stand­ing as a party in in­ter­est un­der sec­tion 1109(b) of the bank­ruptcy code.”

In a fur­ther fil­ing also on Sept. 6, the com­mit­tee asked Swain to al­low it to re­place the board as the rep­re­sen­ta­tive of the Puerto Rico author­i­ties in Ti­tle III bank­ruptcy in the GDB bank­ruptcy.

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