Update on GDB Restructuring

On August 10, 2018, the GDB filed a motion before Judge Swain commencing a Title VI case (separate from the Debtors’ Title III cases) to seek approval of a proposed restructuring (or “Qualifying Modification”) of the claims of GDB’s unsecured bondholders and certain GDB depositors under Title VI of PROMESA.

The Title III Debtors and certain other government depositors also hold claims against GDB, but the proposed Qualifying Modification did not purport to restructure such claims.  Rather, these claims would be restructured through a series of transactions to be effectuated, upon approval of the Title VI Qualifying Modification, pursuant to the Government Development Bank of Puerto Rico Debt Restructuring Act (the “GDB Restructuring Act”)

The Committee had serious concerns with respect to the contemplated restructuring of GDB and related transactions (collectively, the “GDB Restructuring”).  Among other things, the GDB Restructuring Act purported to transfer the lion’s share of GDB’s valuable assets away from the Title III Debtors and to a newly formed entity for the benefit of certain consenting creditors.  Moreover, the Committee was concerned that the GDB Restructuring would result in the Title III Debtors losing valuable claims they may hold against GDB and current and former officers and directors of GDB, before there has been an adequate investigation with respect to such claims.

For these (and other) reasons, the Committee filed a notice of its intent to object to GDB’s Title VI Qualifying Modification which summarized its concerns, and which can be viewed here.  In addition, the Committee filed a number of other pleadings with respect to the GDB Restructuring in the Title III cases and in GDB’s Title VI case.

Subsequently, on September 17, 2018, GDB and AAFAF informed the court that, among other things, the releases to be given by the Title III Debtors and any other government entities under the Restructuring Act would not include former officers, directors, employees, agents, or representatives.

Furthermore, on October 4, 2018, the Committee, GDB, AAFAF and the Oversight Board entered into a stipulation that resolved the Committee’s remaining concerns with the GDB Restructuring.  The stipulation, which was so-ordered by the court on October 9, 2018 and which will become effective when the Qualifying Modification is approved and consummated,  provides a number of new and substantial benefits for the Title III Debtors (and, through them, their creditors), in exchange for the Committee withdrawing its objections to the GDB Restructuring.  Among other things:

  • GDB will transfer $20 million in cash, plus a potential additional amount of up to $10 million in cash, to the Public Entity Trust for distribution, on a first priority basis, to certain Title III Debtors.
  • To the extent that GDB has a property interest in legal claims that GDB may assert or be party to in its capacity as fiscal agent or financial advisor, or such other representative capacity to a Title III Debtor or other non-GDB government entity, such claims will be transferred to the applicable Title III Debtor or other non-GDB government entity.
  • GDB’s net claim against the Commonwealth will be reduced by the amount of federal funds on deposit at GDB (restored by the Commonwealth) of approximately $312 million, with GDB’s claim against the Commonwealth capped at $578 million.  The Title III Debtors reserve the right to challenge GDB’s claim.
  • GDB will release a claim of over $324 million against PREPA on account of funds PREPA allegedly withdrew from GDB while GDB was insolvent.

On November 7, the court approved GDB’s Qualifying Modification, which went effective on November 29, 2018.