The renegotiation of $18 billion in Puerto Rico debt is creating fresh headaches for a New York bank caught up in conflicts of interest between disaffected creditors, WSJ Pro Bankruptcy reported. Bank of New York Mellon Corp., the bond trustee for Puerto Rico’s sales-tax debt, expects to spend up to $40 million defending itself against creditors who say it failed to carry out its duties to protect them, according to court records filed on Wednesday. Creditors holding these sales-tax bonds, known as Cofinas, sued BNY Mellon in New York last year, shortly before Puerto Rico embarked on a court-supervised bankruptcy to sort through a $120 billion pile of bond debt and pension obligations. The $18 billion in Cofina bonds are on the verge of being written down under a complex settlement that comes up for court approval on Jan. 16. Assuming U.S. District Judge Laura Taylor Swain approves the planned restructuring, creditors can resume suing BNY Mellon.
House lawmakers concerned about the possibility of self-dealing and other hidden conflicts of interest in Puerto Rico’s $123 billion bankruptcy introduced a measure yesterday intended to strengthen reporting requirements, after one of the case’s most influential consultants was shown to have an undisclosed stake in Puerto Rico’s debt, the New York Times reported. Representatives put the bipartisan measure forward after the Times reported that the consultant, McKinsey & Company, had bought millions of dollars’ worth of Puerto Rican bonds at a deep discount and had not disclosed that investment. That puts the consulting firm, which is advising a federal oversight board as it leads the island through fiscal reforms and a debt restructuring, in a position to profit from the plans that it is helping to design. “The people of Puerto Rico can’t have faith that this oversight board is putting their interests first if consultants helping implement the restructuring could profit from how much debt service is available under the very fiscal plans they design,” said Representative Nydia M. Velázquez (D-N.Y.), who is the lead sponsor of the bill. Other sponsors include Representative Rob Bishop (R-Utah), who is chairman of the House Natural Resources Committee; Representative Raúl M. Grijalva (D-Ariz.), who is expected to become chairman next year; and Jenniffer González-Colón (R-P.R.), who represents Puerto Rico as a nonvoting member. The House Natural Resources Committee has jurisdiction over United States territories and drafted the bankruptcy-like law that governs Puerto Rico’s restructuring proceedings, but it left out the disclosure provisions customarily found in bankruptcy statutes. Read more.
In related news, Puerto Rico will not obtain a clear picture of how soon it will finish restructuring the bulk of its public debt until the spring, a lawyer for the U.S. commonwealth’s federally appointed fiscal oversight board told a judge on yesterday, Reuters reported. It is also possible an adjustment plan could be imposed on creditors, a process known as a cramdown, the lawyer said. Martin Bienenstock, who represents the board tasked with overseeing the island’s finances and debt restructuring, said more details on a plan of adjustment for the central government’s debt would be known by a “March-April time frame.” Puerto Rico has been in federal court since May 2017 trying to restructure roughly $120 billion in public debt and unfunded pension liabilities under a form of bankruptcy. So far only about $4 billion of Government Development Bank debt has been restructured through a consensual deal with creditors. Deals are in the works for the island’s Sales Tax Financing Corporation, known as COFINA, and the Puerto Rico Electric Power Authority (PREPA). Bienenstock told U.S. District Court Judge Laura Taylor Swain, who is hearing Puerto Rico’s bankruptcy case, that mediation efforts between the island and creditors will resume early next year. The objective is to reach consensus over a plan of adjustment for roughly $13 billion of general obligation debt and almost $50 billion in unfunded pension obligations, he added. Read more.
Puerto Rico Governor Ricardo Rosselló yesterday signed into law legislation to provide nearly $2 billion in tax relief over five years amid concerns by the U.S. commonwealth’s federally created fiscal oversight board about how the island will fund the tax break, Reuters reported. Rosselló said the new law will improve the island’s investment climate, while providing tax cuts for residents and businesses. The legislation, which was introduced in April, establishes an earned income tax credit of as much as $2,000 annually per worker and slightly reduces individual and corporate income tax rates, as well as the sales tax on prepared food. It further eliminates a tax on business-to-business transactions for those establishments with annual revenue of less than $200,000, affecting almost three-quarters of island businesses. Most of the changes will take effect next year, the governor said.
