Failure to reach debt deal on time may give creditors right to end it

By The Star Staff

Some 25 creditors will have a chance to explain their numerous objections to the debt disclosure statement, the document that explains in layman’s terms the debt adjustment plan for some $35 billion in commonwealth debt, during hearings that start Tuesday in the U.S. District Court.

The process is the first step toward the confirmation of the debt adjustment plan, which the Financial Oversight and Management Board hopes to complete by December. Failure to achieve a deal by the effective date, Jan. 31, 2022, may give parties to the plan support agreement the right to terminate it.

The Plan of Adjustment would restructure some $35 billion of debt and other claims against the Commonwealth of Puerto Rico, the Public Buildings Authority (PBA), and the Employee Retirement System (ERS), and more than $50 billion of pension liabilities. The debt is expected to be reduced to about $7.4 billion in new general obligation (GO) debt. The debt adjustment plan divides creditors into about 65 classes with different recoveries.

The objections to the plan centered not only on its content but also on the process to confirm the plan.

Some of the objections centered around a best interest report, in which the oversight board describes why the plan is in the best interest of the creditors, a requirement of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). The Disclosure Statement fails to include information about the value, availability, and allocation of the commonwealth’s assets, making it impossible for creditors to determine if they believe that the Proposed Plan represents “a reasonable effort by the [commonwealth]” to repay its creditors, and that the Proposed Plan “affords all creditors the potential for the greatest economic return from Debtor’s assets.” The Best Interests Test Reports do not provide “adequate information” because the economic and financial information has not been verified by the oversight board, the commonwealth, or any advisers.

Another criticism centers around cash restrictions, as the commonwealth has bank accounts whose funding is restricted. One creditor noted that the Disclosure Statement conveys the oversight board’s conclusion that the commonwealth should maintain an unrestricted liquidity balance of at least $2.5 billion, reserve an additional $750 million in funds purportedly needed for the commonwealth’s Disaster Aid Revolving Fund, maintain a $1.3 billion emergency reserve, and provide some $900 million for the LUMA Funding Requirement, but it provides little justification for these significant retentions.

The Unsecured Creditors Committee said it has identified billions of dollars in assets, including, but not limited to, cash, past due receivables, proceeds from the monetization of assets, and issuance of additional bonds that could be used to provide commonwealth General Unsecured Claims with recoveries well in excess of the amount contemplated under the Proposed Plan, which is less than 3%.

Another objection is that the Disclosure Statement does not provide a definition of essential services, which would complicate allocation of resources.

Several creditors noted that the debt plan fails under PROMESA because the Fiscal Plan expressly contemplates that the commonwealth will be operating at a sustained deficit by no later than fiscal year 2036, while also issuing new GO debt maturing in 2037, 2041 and 2046.

Regarding the feasibility of the plan, other creditors said the data used to determine feasibility is outdated.

One creditor, bond insurer Ambac Assurance Corp., noted that the Disclosure Statement should be amended to acknowledge the risk that the court may find given that the Fiscal Plan compels the plan to violate confirmation requirements, and that the oversight board may be required to amend the Fiscal Plan in order to achieve a confirmable debt plan.

Several creditors had objections to the debt deal’s dischargeability of claims. They said that any claims arising under the constitutional Takings Clause is nondischargeable and cannot be adjusted or compromised by a plan of adjustment. The Takings Clause states private property cannot be taken for public use, without just compensation. Some private companies such as Suiza Daily and Vaquerias Tres Monjitas, which are milk producers, said their claims are nondischargeable.

“The proposed impairment and discharge of the Takings Clause claims renders the Plan patently unconfirmable,” they said.

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