Broad support for POA signaled as confirmation hearings begin
By The Star Staff
After five years of bankruptcy for the island government, the Financial Oversight and Management Board for Puerto Rico sought confirmation Monday of its plan of adjustment to restructure some $33 billion in debt that doesn’t contemplate any cuts to government employee pension benefits to authorize new bond issuances.
The oversight board filed an eighth amended plan of adjustment, or POA, and oversight board counsel Brian Rosen, an attorney with Proskauer Rose, said at the hearing Monday that a modified version of the eighth amended plan was filed Sunday to accommodate technical changes. The Government Development Bank Debt Recovery Authority, which agreed to support the POA, only enhanced the magnitude of a class that had already accepted the plan.
The POA would reduce the commonwealth’s outstanding debt by almost 80%, to $7.4 billion from $33 billion. The plan includes a base contribution to a pension reserve trust of a minimum of $175 million a year for the next 10 years. If in any given year the certified fiscal plan as of the effective date of the plan projects a primary budget surplus exceeding $1.75 billion, the base contribution to the pension reserve trust would rise to 50% of that projected surplus.
Oversight board attorney Martin Bienenstock of Proskauer Rose said in an opening statement that his client was proud to ask the court to approve the latest version of the plan, but he noted that although it meets legal requirements, the board still wishes more could be done.
“The plan must be and is based on the facts on the ground,” he said.
Puerto Rico’s population has been steadily declining and is expected to continue that pattern due to outmigration and because deaths have exceeded births. Bienenstock said the oversight board hopes the debt restructuring will lead to new investments in Puerto Rico, which will “turbo charge” the economy, similar to what happened in Detroit and other Chapter 9 municipalities that carried out restructurings.
Under Title III of the Puerto Rico Oversight, Management and Economic Stability Act, commonly known as PROMESA, Bienenstock said, the confirmation standard to meet isn’t the same as in other bankruptcy chapters, namely that every creditor has to achieve a better recovery than they would under a Chapter 7 liquidation, for instance. Rather, he said, Title III requires better treatment on an aggregate basis than what creditors would get outside of the Title III process.
While creditors that oppose the plan rely on statutes to back up claims that they should get payment in full, Bienenstock noted if that were the case there would be nothing to restructure. He also noted that federal bankruptcy preempts other laws.
In the central government’s bankruptcy case, some objectors are relying on contract clauses under the U.S. and local constitutions to demand full payment. One such objector is Peter Hein, he said. However, Bienenstock noted that Hein must accept the plan because the members of his class of retail investors have accepted the settlement.
The lawyer also refuted Hein’s claims about lack of due process. Hein insists on litigating the priority of his debt in an adversarial proceeding, but Bienenstock said that should not prevent the confirmation of the plan.
In his opening arguments for the oversight board, Rosen said the debt deal is supported by most groups, including retail bondholders as well as public employees following benefit modifications that were removed from the debt deal.
John Rapisardi, a lawyer with O’Melveny & Myers, which represents the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF by its Spanish initials), noted that the debt deal will not impose cuts to pensions. The AAFAF and Gov. Pedro Pierluisi Urrutia, who oppose pension cuts, are now supporting the plan.
Susheel Kirpalani, a lawyer with the firm Quinn Emanuel Urquhart & Sullivan, which represents the Lawful Constitutional Debt Coalition, also argued in favor of the plan as his client signed onto the deal back in 2019.
Dennis Dunne of Millbank for Ambac Assurance Corp. said the plan “is the best and likely only path forward.” While his client insists it should have gotten a higher payment, Dunne said the plan is fragile and the only path available.
Catherine Steege, a lawyer with Jenner & Block that represents the Official Committee of Retired Employees, said the original plan would have cut retirees’ benefits by as much as 25% but the committee insisted on lower cuts. The committee backed the plan with the proposed 8.5% cut to pensions higher than $1,500 per month.
The retiree committee agreed to the settlement because it contains a pension reserve that ensures pension payments for government workers in the future even though the group was publicly attacked.
Meanwhile, Luc Despins, a lawyer with Paul Hastings, the counsel for the Unsecured Creditors Committee, spoke in favor of the plan -- even though his class voted against it -- because, he said, it is the best option.
The plan had its detractors, nonetheless. One of the arguments against the plan is that the government has reserves to pay its creditors more than the $7 billion in cash and $7 billion in bonds plus contingent value instruments that it plans to use.
Hein made the argument that hedge funds purchased Puerto Rico bonds at 20 cents on the dollar and now will recoup the same amount in investment as him. He said the government’s failure to meet its payments will prevent Puerto Rico from accessing bond markets.
Enrique Almeida, a lawyer for credit unions, said his clients invested in bonds at the government’s request, which hid from them that the government was on the verge of insolvency. He was referring to an incident that took place under the past administration of former Gov. Luis Fortuño.
Lawyers for Finca Matilde and Sucesión Mandry demanded payment for the government’s taking of their properties through eminent domain. Sucesion Mandry is owed about $30 million as established by an Appeals Court ruling, but may get less or nothing.
José Sánchez-Girona, a lawyer for Mapfre PRAICO Insurance Co., said his client lost $15 million in payments it had to make as a result of unfinished projects.
Peter DeChiara, a lawyer for the SEIU and UAW unions, noted that the debt deal is very beneficial to creditors, which is the reason for their support, but that it may lead the island to a second bankruptcy.