%1

Seven members of the U.S. House of Representatives have sent a letter to the Puerto Rico Oversight Board asking it to postpone debt negotiations until an investigation of insider trading can be completed, Bond Buyer reported. U.S. Rep. Raúl Grijalva (D-Ariz.) and six other members of Congress has sent a letter on Wednesday to Puerto Rico Oversight Board Executive Director Natalie Jaresko seeking an investigation into alleged insider trading of Puerto Rico bonds. The Representatives signing the letter were: Grijalva, Jesús García (D-Ill), Alexandria Ocasio Cortez (D-N.Y.) Adriano Espaillat (D-N.Y.), José Serrano (D-N.Y.), Darren Soto (D-Fla.) and Nydia Velázquez (D-N.Y.). Grijalva is chairman of the House Natural Resources Committee, which oversees Puerto Rico and the other U.S. territories. García, Soto, and Velázquez are also members of the committee. According to the lawmakers, “hedge funds may have unlawfully used the restructuring proceedings to make significant profits.” On Oct. 6 National Public Finance Guarantee filed a motion asking the Puerto Rico bankruptcy court, the U.S. District Court for Puerto Rico, to have the U.S. Trustee conduct a 60-day investigation into the alleged trading. Since then the investment funds have filed replies with the court saying that they did nothing wrong.

Puerto Rico residents are set to choose a new governor in the Nov. 3 election after one of the most turbulent periods in the U.S. territory’s history, marked by natural disasters, economic crisis, political upheaval and now a pandemic, the Wall Street Journal reported. The two main candidates—Pedro Pierluisi, a former secretary of justice and Puerto Rico representative in Congress, and Carlos Delgado, the longtime mayor of Isabela—are running neck and neck. They have promised a host of policies to revive the battered economy as pandemic restrictions and social-distancing measures curtail tourism and other business activities. Pierluisi calls for rapid investment of federal disaster funds, reduced tax rates for small businesses and expanded broadband infrastructure. As a member of the pro-statehood New Progressive Party, he argues that Puerto Rico’s economic development ultimately hinges on becoming the 51st state. Delgado—a member of the Popular Democratic Party, which supports keeping the island a U.S. territory with more autonomy—promotes a revitalization plan that involves tapping federal funding but not seeking statehood. He proposes reviving the economy by creating tax-free zones for young entrepreneurs, nurturing industries like aeronautics that have shown promise on the island and bolstering science and technology education. The territory had been grappling with a decadelong recession and a bankruptcy declaration when Hurricane Maria struck in 2017, destroying tens of thousands of homes and wiping out the island’s electrical grid. In the aftermath, a contracting scandal and longstanding concerns over corruption led Congress and the White House to tighten controls over federal recovery funding.

Key Puerto Rico bondholders asked the court to set plan-of-adjustment deadlines for the Puerto Rico Oversight Board to meet, Bond Buyer reported. Four groups of investment funds filed the joint motion on Tuesday night in the U.S. District Court for Puerto Rico, which is handling the bankruptcy. The litigants in Tuesday’s motion are the Lawful Constitutional Debt Coalition, the Ad Hoc Group of Constitutional Debtholders, Ad Hoc Group of General Obligation Bondholders, and the QTCB Noteholder Group. Investment and hedge funds holding Puerto Rico central government bonds are the members of these groups. The board yesterday said that it was reviewing the filing and would respond to it at a later point. Puerto Rico bondholders have asked Judge Laura Taylor Swain to put deadlines on the board's progress to a central government plan of adjustment. The groups asked the court to require the board to do one of three things by Nov. 30: Affirm that it will try to finalize the existing proposed plan of adjustment announced in February, file a modified version of the existing plan with a modified disclosure statement, or file a new proposed plan of adjustment and disclosure statement. The groups told the court to require that by Feb. 1, 2021, the court consider the adequacy of the disclosure statement.

Bond insurer National Public Finance Guaranty filed a motion on Monday in a court seeking an investigation of likely illegal hedge fund trading of Puerto Rico bonds during mediation over those bonds, Bond Buyer reported. National filed the motion Monday afternoon in the U.S. District Court for the District of Puerto Rico, which is overseeing the Puerto Rico Oversight, Management, and Economic Stability Act’s Title III bankruptcy process. In the motion, National focuses on the period from May 31, 2019, when parties signed an initial Plan Support Agreement for Puerto Rico’s central government debt, to the present. During the period, there is “substantial reason to believe” that some hedge fund mediation participants illegally traded in the bonds, according to National. U.S. District Judge Laura Taylor Swain barred participants from trading in the bonds while participating in mediation. On Feb. 9, 2020, the Puerto Rico Oversight Board announced it had reached a new Plan Support Agreement with hedge fund groups and that the new plan had much more generous terms for late vintage bonds. In its motion, National said that member hedge funds of three negotiating groups — the Lawful Constitutional Debt Coalition, the QTCB Noteholder Group, and the Ad Hoc Group of Constitutional Debtholders — had greatly increased their holdings between the first and second PSA, and that this raised “serious concerns.” Read more. 

In related news, a bankruptcy and corporate law professor will be the new chairman of a federal control board that oversees Puerto Rico’s finances, officials announced on Tuesday, the Associated Press reported. Prof. David Skeel will replace José Carrión, who had led the board since the U.S. Congress created it in 2016 as the U.S. territory struggled through an economic crisis and sought to restructure a portion of its more than $70 billion public debt load. It was the biggest municipal bankruptcy filing in U.S. history. Carríon had announced in July that he was stepping down, and two other board members have stepped down since. Those two other positions have not been filled. Read more.

The U.S. Virgin Islands has called off efforts to sell its rum-tax collections to bondholders, extending the struggling territory’s long banishment from credit markets, WSJ Pro Bankruptcy reported. Gov. Albert Bryan said that the territory had suspended a proposal to sell nearly $1 billion in securitization bonds, dashing for now his ambitions to generate some short-term fiscal relief for the cash-strapped government. The Virgin Islands had offered a suite of safeguards to entice investors to lend, promising them a stronger claim on rum-tax revenues and legal protections from a potential government bankruptcy. Market conditions for municipal borrowers could hardly be frothier, offering the territory a golden opportunity to refinance a big chunk of public debt at lower interest rates. Gov. Bryan blamed a lawsuit filed by public retirees and certain legislative amendments for impeding the offering ahead of a Tuesday deadline. Pulling the deal — a relative rarity in the municipal market — marks another financial setback for the Virgin Islands, which faces challenges more severe in some respects than its larger Caribbean neighbor Puerto Rico. “Buyers likely just wanted more yield than the transaction could tolerate and still be effective,” said Matt Fabian, partner at Municipal Market Analytics. The offering was structured to push back $255 million in scheduled interest payments over the next three years into the 2030s, freeing up funds for elected leaders to spend on other pressing needs. Gov. Bryan had suggested using the savings to shore up the territory’s public pension system, one of the worst-funded in the U.S. Without a cash infusion, the territory’s Government Employees’ Retirement System has projected it will have to slash benefits for roughly 8,700 retirees by more than half as early as 2023. Like Puerto Rico, the Virgin islands is also contending with outdated infrastructure, a deeply indebted power monopoly and lingering aftereffects of the devastating 2017 hurricane season. Puerto Rico has been under bankruptcy protection since 2017 and isn’t paying much of its debt. Bankruptcy isn’t an option under U.S. law for the Virgin Islands, which has rejected suggestions of defaulting on its debt or seeking concessions from creditors.

Puerto Rico’s federally-appointed oversight board on Wednesday made its case to reject $5.5 billion in bond debt as part of the commonwealth’s ongoing financial restructuring, Reuters reported. Appearing before U.S. District Judge Laura Taylor Swain via a telephonic hearing, oversight board attorney Martin Bienenstock of Proskauer Rose argued that the judge should reject claims brought by holders of bond debt issued by three Puerto Rico instrumentalities, including the Highways and Transportation Authority, because they do not have security or ownership interests in the commonwealth’s funds. The board’s motions for partial summary judgment are part of the island’s court-supervised restructuring process, which has been proceeding in the U.S. District Court for the District of Puerto Rico since May 2017.

The lack of transparency and financial disclosures in the Puerto Rico bankruptcy process have been a continual problem on the island, according to a commentary in the Orlando Sentinel. Congress is finally taking action to correct a long-exploited loophole in the PROMESA law that allows companies consulting on the Puerto Rican bankruptcy to forgo disclosures traditionally required in bankruptcy proceedings. Legislation advancing through Congress, the Puerto Rico Recovery Accuracy in Disclosures Act (PRRADA), is designed to create transparency in the Puerto Rican bankruptcy process and bring disclosure requirements on the island up to par with that of the rest of the country. The bill was recently voted favorably out of the House Judiciary Committee and is on its way to facing a vote before the full House of Representatives. Read the full commentary. 

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

In related news, President Trump, who has long held up federal aid to help Puerto Rico recover from back-to-back hurricanes in 2017, announced on Friday that he was finally releasing $13 billion to rebuild its electrical grid and repair schools, the New York Times reported. For three years, Trump has been at odds with Puerto Rico, harshly attacking its leadership and blocking or placing restrictions on assistance after Hurricanes Irma and Maria ravaged the island, arguing that the island territory had received too much money already. At one point, he even discussed with aides the prospect of selling Puerto Rico rather than be saddled with the cost of recovery. But with Puerto Ricans who relocated to Florida now a significant voting bloc in one of the most critical states in the fall campaign, the president abruptly pivoted and presented himself as a friend to the island and its people. Read more.

Democratic presidential nominee Joe Biden is calling on the federal government to offer debt relief to Puerto Rico as part of a broader plan to support the bankrupt U.S. territory as he works to appeal to Puerto Rican voters in Florida, Bloomberg News reported. Biden would encourage an end to the territory’s fiscal austerity, according to a plan released by his campaign yesterday as he traveled to central Florida. He would also accelerate and increase federal funding for recovery from hurricanes and COVID-19. He is also proposing a federal working group for Puerto Rico that would report directly to the president.

Puerto Rico bankruptcy Judge Laura Taylor Swain on Wednesday rejected bond insurers’ continued efforts to lift a stay on the claims for nearly $7 billion in revenue bond debt, The Bond Buyer reported. Swain rejected other arguments to lift the stay or to appoint the insurers as trustee in early July. She said that holders of Puerto Rico Highways and Transportation Authority, Infrastructure and Finance Authority, and Convention Center District Authority bonds didn’t have liens or security interests on money that hadn’t been deposited in the bond payment accounts when the authorities were placed in bankruptcy. In the July 2 decision, she left it to the parties to decide how to handle remaining lines of argument. The sides didn’t reach a consensus, so Swain directed the plaintiffs to submit supplemental briefings in July. On Aug. 11, Judge Swain issued an order rejecting the motions of Assured Guaranty, Ambac Assurance Corp., Financial Guarantee Insurance Company, and National Public Finance Guarantee Corp. made to trustees of the HTA. Since then, according to one attorney, Assured Guaranty submitted an appeal of this decision to the First Circuit Court of Appeals. National, Ambac, and FGIC are co-litigants. It was not yet docketed as of Wednesday. One bond insurer’s lawyer said he expects the insurers to appeal the July 2 decision as well. Judge Swain issued two decisions on Wednesday. In one, she denied the insurers’ stay-relief motions on HTA and PRIFA revenue bonds. She also explained her reasoning for rejecting some of the plaintiffs’ arguments for a lifting of the stay on the CCDA bonds. In the second decision, she denied the motion for a CCDA lift stay for reasons particular to the CCDA bonds.

Earthquakes that rocked Puerto Rico in January and the coronavirus pandemic cost the island $1.1 billion in estimated revenue as Governor Wanda Vazquez closed almost all non-essential activity to help stop the spread of the virus, Bloomberg News reported. Puerto Rico’s revenue for the year that ended June 30 fell short of initial forecasts by $1.1 billion, Francisco Parés Alicea, Puerto Rico’s Treasury Secretary, said in a statement Wednesday. While the revenue collections are down from what was first expected, the $9.29 billion that Puerto Rico brought in for fiscal year 2020 is $276 million more than the revised revenue projections made on May 27. The amount of Puerto Rico’s revenue collections will help determine how much the island can repay its creditors. The U.S. territory is seeking to reduce nearly $18 billion of debt backed by the commonwealth. An oversight board that manages Puerto Rico’s bankruptcy in May cut $15 billion from the estimated amount available to pay principal and interest through 2032 after the virus stalled the island’s economy. Puerto Rico’s oversight board, which manages the commonwealth’s finances, disagrees with the Treasury Department’s calculations, saying that the government failed to include tax payments pushed into the fiscal 2021 year. Counting those funds would increase the 2020 collections to $9.6 billion, the board said in a statement on Wednesday.