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A hedge fund yesterday sued to have Puerto Rico’s bankruptcy case thrown out, arguing that the federal oversight board now guiding the island’s financial affairs was unconstitutionally established, the New York Times reported. In a lawsuit filed in U.S. District Court in San Juan, the hedge fund, Aurelius Capital, cited the “appointments clause” of the U.S. Constitution, which calls for all principal officers of the federal government to be appointed by the president, then confirmed by the Senate. That did not happen when the seven members of Puerto Rico’s oversight board were selected, Aurelius said in its motion to dismiss the bankruptcy. The board members were instead “handpicked by individual members of Congress,” it said, through “an intricate system of Balkanized lists, designed to severely constrain the president’s appointment powers.” No Senate confirmation proceedings occurred, although senators of both parties were among the members of Congress who made recommendations last year to President Barack Obama for the board. Since the federal bankruptcy code specifically bars Puerto Rico from declaring bankruptcy, Congress passed a special law last year called Promesa that gives bankrupt United States territories a way to seek protection from their creditors. It includes elements of chapter 9 municipal bankruptcy. Read more. 

For updated news and analysis of Puerto Rico's debt crisis, along with current docket filings in Puerto Rico's case, be sure to visit ABI's "Puerto Rico in Distress" webpage.

Puerto Rico's federally appointed financial oversight board said yesterday that it will investigate the U.S. commonwealth's debt "and its relationship to the fiscal crisis" which has left it with $72 billion in debt and a 45-percent poverty rate, Reuters reported yesterday. The board, a creation of the 2016 federal Puerto Rico rescue law known as PROMESA, said that the investigation will review the fiscal crisis, examine the debt and how it was issued, including disclosure and selling practices. "The Oversight Board considers this investigation an integral part of its mission to restore fiscal balance and economic opportunity and to promote Puerto Rico's reentry to the capital markets pursuant to its responsibilities under PROMESA," the statement said. Read more. 

For updated news and analysis of Puerto Rico's debt crisis, along with current docket filings in Puerto Rico's case, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

The Commonwealth of Puerto Rico and its official committee of retired employees of the Commonwealth of Puerto Rico’s filed with the U.S. Bankruptcy Court separate objections to the motion seeking appointment of additional committee of government employees and active pension plan participants or, in the alternative, reconstitution of the retiree committee, BankruptcyData.com reported today. The committee’s objection explains, “Both a motion to direct the appointment of an additional committee and a motion to change the membership of an existing committee require the movant to demonstrate that any existing committee as a whole, or in part, does not adequately represent creditors’ interests.” The Commonwealth also objected to the ad hoc group of general obligation bondholders’ motion to reconstitute the statutory committee of unsecured claimholders. This objection asserts, “The Motion should be denied. Primarily, as the U.S. Trustee put it in denying the reconstitution of the UCC to include Constitutional Debtholders, creditors asserting secured claims or full priority over other unsecured claims have no place on an existing or separate statutory committee of unsecured claimholders.” Read more. 

For updated news and analysis of Puerto Rico's debt crisis, along with current docket filings in Puerto Rico's case, be sure to visit ABI's "Puerto Rico in Distress" webpage.

U.S. mutual funds that held onto Puerto Rican debt as its economy crept toward collapse could get drawn into battles that pit their own investors against each other, Reuters reported today. The reason for the quandary lies in the territory's Byzantine capital structure, where 18 public agencies owe a combined $120 billion in bond and pension debt. Bonds held by the companies' many funds are spread across myriad credits, some in direct competition for recoveries, meaning wins for some investors trigger losses for others. For OppenheimerFunds and Franklin Advisers, negotiating that minefield is particularly important. The funds say that their cross-holdings reflect a long-term commitment to Puerto Rico, and give them more of a stake than other creditors. Bankruptcy and municipal bond experts say, however, that the competing claims raise questions about whether they can represent investors' best interests. It adds a wrinkle to already complex restructuring talks, muddying the path to recovery for investors who tied up their savings in Puerto Rico. "This is not something I've seen in the bankruptcy world," said Prof. Drew Dawson of the University of Miami School of Law and ABI’s Spring 2017 Resident Scholar. While it is not rare for a creditor to hold multiple tranches of debt, it is less common when the creditor runs many funds with competing investments, he added. "You run all these funds — which do you side with?" Prof. Dawson said. "If I were an investor, I'd be concerned." 

A group of hedge funds that hold about $3 billion of Puerto Rico sales-tax bonds released court documents showing how much of the commonwealth’s debt that each manages, Bloomberg reported yesterday. The disclosure is part of Puerto Rico’s record bankruptcy. The island is seeking to cut $74 billion sold by the commonwealth and its agencies that helped fill budget deficits as its economy shrunk in the past decade. Numerous agencies sold the bonds, which are repaid from various revenue pledges. Bondholders are now fighting over those different revenue sources. A key issue is which type of debt should receive a better recovery rate: $13.3 billion of general obligations, which have a constitutional guarantee of repayment, or $17.6 billion of bonds. The Cofina structure has a junior-lien component, and while the pool of bondholders designates itself as the senior Cofina group, some members hold junior sales-tax bonds. The firms hold a combined $2.5 billion of senior Cofinas and $602 million of junior sales-tax debt.

For updated news and analysis of Puerto Rico's debt crisis, along with current docket filings in Puerto Rico's case, be sure to visit ABI's "Puerto Rico in Distress" webpage: http://www.abi.org/PR-crisis.

Elias Sanchez, Governor Ricardo Rosselló’s liaison to Puerto Rico’s financial oversight board who has been criticized over his financial disclosures, resigned yesterday, according to Reuters. Sanchez, a trusted adviser to Rosselló who was effectively the face of the Puerto Rican government on issues concerning the U.S. territory's massive debt restructuring, said that he wanted to focus on opportunities in the field of law. Rossello appointed Christian Sobrino Vega, president of Puerto Rico's Government Development Bank (GDB), as Sanchez's replacement on the board. In a statement, the governor called Sobrino "instrumental in the success of our administration." As Rosselló’s delegate on the board, Sanchez, a former lobbyist, had become a favorite target of investors unhappy with potential cuts to debt repayment. Sanchez insists the decision to resign was his alone. "In no way was I pressured by anyone," he said, adding that while he may have come under attack, he is "very comfortable with everything" he did on the board to represent the best interests of the people of Puerto Rico.