Puerto Rico’s largest mutual-fund bondholders have broken their silence in an ongoing $30 billion creditor standoff, underscoring tensions between the commonwealth’s traditional municipal investor base and the hedge funds now involved in its financial restructuring, the Wall Street Journal reported today. Funds controlled by fixed-income giants Franklin Advisers and OppenheimerFunds asked a federal judge last week to enter them as defendants in a lawsuit brought by hedge funds holding general obligation, or GO, bonds that have been in default since July. The lawsuit pits those creditors against investors holding $17 billion in competing bonds known as Cofinas for their Spanish acronym and backed by sales tax revenues. If successful, the lawsuit could compromise the Cofina bondholders’ liens and free up a fresh source of repayment for the GO bondholders, which are guaranteed under the Puerto Rican constitution. The courts, on the other hand, could affirm the commonwealth’s longstanding position that the sales-tax revenues are off-limits to the GO bondholders. U.S. District Court Judge Francisco Besosa could also freeze the dispute in the hopes that the warring investor groups will negotiate a settlement, as the Cofina investors have urged. Congress installed a federal oversight board over the summer to take over Puerto Rico’s financial decision-making, but it has yet to announce the hiring of legal and financial advisors with whom creditors will negotiate. The legal status of the Cofina revenues has never been tested in the courts, and resolving it now would take a major question on creditors’ rights out of the board’s hands. Read more. (Subscription required.)
Don’t miss the “Puerto Rico, ‘Super Chapter 9’ and the Future of Sovereign Debt” session at ABI’s Winter Leadership Conference at Terranea Resort from Dec. 1-3. Register here.
For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage.
