Plan Support Agreement

On February 9, 2020, the Oversight Board announced that it has reached an agreement with certain hedge funds regarding a proposed restructuring of general obligation bonds issued by the Commonwealth of Puerto Rico and certain other bonds guaranteed by the Commonwealth (collectively, the “GO Bonds”), which restructuring is to be implemented through a plan of adjustment under Title III of PROMESA.*

GO Bondholder Deal is a Bad Deal

The Oversight Board’s initial proposed plan of adjustment, filed on September 27, 2019, provided unsecured creditors with a recovery of only “up to 1.8%” (according to the Oversight Board’s own estimates), and the Oversight Board’s amended proposed plan of adjustment, filed on February 28, 2020 (the “Amended Proposed Plan”) provides unsecured creditors with a recovery of only 3.9%.  The Amended Proposed Plan is insulting to all Puerto Ricans.

The treatment of Puerto Rico unsecured creditors under the Amended Proposed Plan will cause substantial harm to the local business community and the Puerto Rico economy.  Indeed, the Oversight Board has estimated that there are $5.5 billion in Puerto Rico general unsecured claims against the Commonwealth.

A number of noted experts have commented with respect to the negative consequences of the initial plan of adjustment filed in September 2019, comments which are equally applicable to the Amended Proposed Plan filed in February 2020:

  • Former Puerto Rico bankruptcy judge Gerardo Carlo Altieri has stated that “[t]here may be many of these [suppliers] that decide to go bankrupt if they cannot collect for their services and for what they sold to the government.”
  • Economist Antonio Fernós Sagebién has stated that “[i]f a company doesn’t collect for what it sold, it cannot employ people, it reduces jobs, consumption and it stops injecting liquidity into the system.”
  • Economist Joaquín Villamil has stated that the poor payout to Puerto Rico creditors “can have a very huge impact on local businesses and non-profit organizations.”
    See A Blow to Government Contractors and Suppliers, El Nuevo Día, Oct. 14, 2019 here. Click here for the Committee’s recent media appearances with respect to the GO bondholder deal.

Why the GO Bondholder Deal is a Bad Deal

  • Hedge Funds Will Receive a Handsome Profit.  The Oversight Board’s deal promises to provide hedge funds with a substantial recovery of upwards of 77% of the face amount of their GO Bonds (with the precise recovery depending on the series of bonds).
  • This recovery will likely translate into handsome profits for these hedge funds, given that many of them acquired GO Bonds at steep discounts in the secondary market.  These hedge funds are not long-time investors who got “stuck” holding GO Bonds, but rather they are speculators who actively sought to buy GO Bonds at a low price after Puerto Rico’s bankruptcy filing in order to make a profit.  For example, a hedge fund that bought vintage (i.e., pre-2011) GO Bonds in December 2017 at the then-prevailing price of 15-20 cents would recover approximately 75 cents under the GO bondholder deal, thereby receiving a return of more than 250% on its investment.
  • In addition, to the foregoing recoveries, these funds stand to receive $350 million—and potentially up to $400 million—in “consent” fees, to be paid by the Commonwealth, simply for agreeing to support the deal and the related plan of adjustment.  Worse, these hedge funds will also be entitled to a “break-up fee” of $100 million, to be paid by the Commonwealth, in the event the GO bondholder deal is terminated under certain circumstances.
  • Hedge funds to Receive Broad Releases from Litigation Commenced by Committee.  The Oversight Board’s deal with the hedge funds would also give holders of GO Bonds broad releases from all challenges to the validity of their GO Bond claims.
  • Throughout the Commonwealth’s PROMESA case, the Committee has been fighting to challenge more than $10 billion of GO Bonds that were issued in violation of Puerto Rico’s constitutional debt limit.  Under the Oversight Board’s deal, holders of GO Bonds would be released from all such challenges.
  • Puerto Rico Creditors and the Puerto Rico Economy Will Suffer.  In stark contrast to the recovery for bondholders, Puerto Rico creditors who supplied goods and services to the Commonwealth would receive a dismal recovery of only 3.9%. The treatment of Puerto Rico creditors under the Amended Proposed Plan will cause substantial harm to the local business community and the Puerto Rico economy.  The Oversight Board and the Commonwealth should provide a higher recovery to Puerto Rico creditors.  Doing so would have a positive multiplier effect on the Puerto Rico economy, as these creditors would reinvest their plan distribution in the Puerto Rico economy—which is obviously not the case for plan distributions made to hedge funds.
  • No Justification for Disparate Treatment.  There is no justification for the staggering difference in recoveries between bondholders and other unsecured creditors, including local trade creditors.
  • While some have argued that GO Bonds are entitled to priority under Puerto Rico’s Constitution over other unsecured claims, any such priority (to the extent it even exists) is preempted by PROMESA.  In fact, before the Oversight Board filed the Amended Proposed Plan, the Oversight Board consistently took the position that the GO Bonds are not entitled to priority under Puerto Rico’s Constitution and now is simply abandoning its position without adequate compensation.

Unless substantial changes are made to the Amended Proposed Plan that address the matters set forth above (as well as others), the path chosen by the Oversight Board will result in excessive payouts to preferred hedge funds, cost the people of Puerto Rico hundreds of millions of dollars in “consent” fees, and leave Puerto Rico unsecured creditors without any meaningful recovery on account of their claims.  For these reasons, among others, the Committee strongly opposes the Oversight Board’s announced deal with hedge funds and the treatment of unsecured claims under the Amended Proposed Plan.

Understanding the Reality of the GO Bondholder Agreement  — Separating Fact from Fiction

The Oversight Board has propagated several myths regarding its agreement with the GO bondholders that make the deal seem more favorable than it actually is.  The Committee’s responses to certain of these myths are discussed below.

The “70% Debt Reduction” Myth: The Oversight Board announced (and many media outlets have repeated) that total Commonwealth debt will be reduced by 70%.

Reality:  This 70% number is highly misleading.  The GO bondholders are only agreeing to a reduction in their bond claims of 20-30 percent (depending on the year of issuance), which translates into a reduction in the Commonwealth’s debt of approximately $4.5 billion, not the alleged $24 billion reduction (70% of $35 billion total liabilities) claimed by the Oversight Board.  The remaining portion of the alleged $24 billion reduction consists of (a) approximately $4 billion of Commonwealth cash that would be used to repay the GO Bonds and (b) approximately $16 billion debt that is not part of the GO bondholder agreement at all.  Using $4 billion of Commonwealth cash to repay GO Bonds should not count as a benefit of the proposed GO Bond restructuring—that’s simply the repayment of debt.  Moreover, no one has agreed to the proposed $16 billion reduction in other debt, which includes:

  • $8.1 billion of claims of various monoline insurers that are asserting the Commonwealth improperly clawed back revenues that should have gone to pay their bonds (i.e., bonds issued by HTA, PRIFA, and CCDA);
  • $3.1 billion of claims of ERS bondholders; and
  • $5.5 billion estimated claims of general unsecured creditors (who, as noted, will only receive 3.9% on account of their claims).

The “New Settlement Savings” Myth: The Oversight Board has stated that the settlement of the challenge to the constitutional validity of certain GO Bonds provides a benefits to the Commonwealth in the amount of approximately $435 million.

Reality:  It is highly misleading to characterize the discounts as a result of the validity challenge as a benefit to the Commonwealth.  In fact, the savings from these discounts are not returned to the Commonwealth or made available to its general unsecured creditor, but simply reallocated to other GO Bonds that are not subject to a constitutional debt limit challenge.  Worse, compared to the previously proposed plan of adjustment (dated September 27, 2019), total distributions to GO bondholders would actually increase by more than $500 million—from $13.39 billion to $13.95 billion.