Creditors, gov’t file objections to disclosure statement

By The Star Staff

Puerto Rico’s creditors and the island government itself have filed objections against the disclosure statement to the third amended plan of adjustment, which would restructure some $35 billion in commonwealth debt, for reasons that go from lack of clarity in the information provided to a lack of legislative approvals to problems with the plan’s own sustainability.

The disclosure statement has to be ruled adequate by the federal bankruptcy court so the plan of adjustment can move forward.

The government’s fiscal agent, the Fiscal Agency and Financial Advisory Authority (AAFAF by its Spanish initials), said the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) conditions confirmation of a plan of adjustment on obtaining all legislative approvals required under applicable law.

“No such legislation has been enacted — which under Puerto Rico law is necessary to issue debt instruments backed by the full faith and credit of the Commonwealth and to implement several other provisions contemplated by the proposed Plan,” the agency said.

While Gov. Pedro Pierluisi Urrutia’s administration is committed to ending the Title III proceedings in order to allow Puerto Rico’s economy to grow and prosper, the AAFAF said the governor has also been clear that his administration opposes any pension cuts and freezes. If deep cuts are imposed on any segment of retirees, they may be forced to choose among food, medicine and shelter when their monthly checks decrease.

“Mandating forced poverty on any segment of Puerto Rico’s retirees will only further stress the Government’s already strained social services programs and increase the future cost of Puerto Rico’s welfare programs as retirees struggle to pay for basic necessities,” the agency said.

While the federal Financial Oversight and Management Board discusses various risk factors in the disclosure statement, it fails to disclose the potential effects of impairing pensions, the AAFAF has pointed out.

Ambac Assurance Corp., a bond insurer, noted defects with the oversight board’s arguments that PROMESA would preempt any commonwealth law that appropriates funds to commonwealth instrumentalities because there is no explanation as to why these statutes are inconsistent with PROMESA, nor can the board demonstrate that Congress intended such a sweeping preemptive effect.

“If the Court accepts the Board’s positions on preemption, this would render the Plan’s classification of claims impermissible as a matter of law under Granada Wines, Inc. v. New England Teamsters & Trucking Industry Pension Fund, which requires that all creditors of equal rank be placed in the same class,” Ambac said. “If, as the Board contends, preemption has wiped away obligation-creating statutes and eliminated any Commonwealth law conferred priorities.”

General obligation bondholder Peter Hein said the disclosure statement does not provide information to back up its claims because since 2018 there have not been audited financial statements issued by the government.

Salud Integral de la Montaña, a health facility represented by attorney John Mudd, said the fact that the oversight board cannot provide assurance of the reliability of the information is contrary to the spirit of PROMESA. The facility noted a lack of information as to cash accounts or any information that the debt deal is in the best interest of creditors.

“In addition, the Disclosure Statement does not enumerate the previous Board recommendations that the Commonwealth has declined to adopt, for example, amendments to law 80 and to donate WIPR TV station to a local non-profit institution in Puerto Rico,” the lawyer said. “This information is important for an investor to be able to judge the Commonwealth’s willingness to put into effect the enumerated recommendations.”

Moreover, the disclosure statement has no information on the possible impact of the G-7 agreement of a minimum 15% tax for all their jurisdictions. This effort was spearheaded by the Biden administration and could mean the end of federal tax exemption in Puerto Rico.

Vaqueria Tres Monjitas, as well as Suiza Dairy, the island’s two main milk producers, said the plan fails to disclose that their multimillion-dollar claims are non-dischargeable under bankruptcy law.

Financial Guaranty Insurance Co., a bond insurer, said the proposed disclosure statement also fails to disclose many key assumptions underlying the proposed plan of adjustment and omits key risk factors associated with such assumptions that may impact the feasibility of the proposed plan.

“The plan is unconfirmable because it provides disparate treatment to the FGIC Insured Bonds in violation of section 1123(a)(4) of the Bankruptcy Code,” the firm said. “At minimum, creditors are entitled to understand whether or not they are entitled to vote on the Proposed Plan, what the Proposed Plan offers to them for recoveries, how they will receive those recoveries, and what risks may exist that would impact such recoveries should the assumptions underlying the Proposed Plan fail to be realized. At present, the Proposed Disclosure Statement fails to provide this necessary information.”

The Unsecured Creditors Committee said the disclosure statement contains no estimate of the recovery percentage that general unsecured creditors in Class 55 could expect under the proposed plan and leaves out important information.

“The Disclosure Statement does not discuss the value and availability of the Debtors’ assets, let alone explain to creditors how the Oversight Board intends to demonstrate that its decisions about the use, allocation, and monetization of its assets represent a reasonable effort to satisfy the Debtors’ obligations to their creditors,” the committee said. “The Committee believes that there are billions of dollars in available assets which could significantly improve recoveries to commonwealth General Unsecured Claimants. Moreover, while the Oversight Board recommends a minimum liquidity balance of no less than $2.5 billion, there is no disclosure regarding the estimated cash on hand as of an assumed Commonwealth Effective Date.”

The proposed plan, the committee added, “appears to seek to impose broad non-consensual third party releases without establishing the existence of the unique circumstances under which such releases may be approved. Separately, and contrary to the case law.”

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