• The San Juan Daily Star

In day 3 of hearings, retail bondholder questions POA’s feasibility

Financial Oversight and Management Board for Puerto Rico Executive Director Natalie Jaresko

By The Star Staff

An official from McKinsey and Co., who are advisers to the Financial Oversight and Management Board, acknowledged in testimony in Title III bankruptcy court on Wednesday that they did not verify independently the information contained in a best interest test to determine if the plan of adjustment is feasible.

Ojas Shah, a partner at McKinsey & Co., in response to questions from retail bondholder Peter Hein, said the firm did not do an analysis of 2021 net operating cash flows and compared them to pre-petition annual debt service on general obligation and Public Buildings Authority debt to see if there were enough resources to pay debt service. Hein previously has asked why Puerto Rico is in bankruptcy when it has some $25 billion in bank accounts.

“We did not independently verify the legal or financial assumptions we were given to do best interest analysis,” Shah said on the third day of hearings to confirm the debt adjustment plan that would restructure some $33 billion in debt.

The best interest report issued in June found that if Puerto Rico’s Title III bankruptcy case were to be dismissed and all claims were enforced under non-bankruptcy law, the estimated range of recoveries as a base case for all creditors would be between 56% and 64% of total commonwealth claims.

The best interest test reports, which are required by the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), make numerous assumptions and provide different scenarios of recovery for commonwealth creditors. The report was filed as an exhibit to the disclosure statement in June.

Under PROMESA, the proposed plan of adjustment should be “feasible and in the best interest of creditors, which shall require the court to consider whether available remedies under the non-bankruptcy laws and constitution of the territory would result in a greater recovery for the creditors than is provided by such plan.”

Also during Wednesday’s hearing, Hein, a retail bondholder, disputed statements made by the oversight board’s executive director, Natalie Jaresko.

Hein tried to convince Judge Laura Taylor Swain that Jaresko’s statement was full of opinions and legal considerations and that she does not have the expertise or jurisdiction to make such a statement. Hein was trying to prove that the plan of adjustment was not as beneficial as the oversight board has painted it to be.

For example, Hein asked how long the fiscal entity has not been supervising the attendance levels of public employees in Puerto Rico. The oversight board has not received reports from the government to that effect.

In answering Hein’s questions, Jaresko did not recall how much of the outstanding debt now subject to renegotiation was issued before 2013. The oversight board had tried to annul debt issued after 2012 because it violated constitutional limits but then opted to put aside the litigation that sought to annul some $6 billion in bonds.

Hein also questioned other witnesses to prove that no retail bondholders were part of the negotiations that devised the plan of adjustment. A witness acknowledged that he did not interact with any bondholders, although he noted that they were able to communicate with the board for other purposes.

According to the plan of adjustment, if confirmed, the bondholders will receive payments through the contingent value instrument (CVI) if the collections of the government of Puerto Rico through the sales and use tax exceed certain projections. Those payments would be in addition to the annual bond payment and can reach up to $400 million per year, or $3.5 billion over the life of the CVI. Bondholders are slated to get about $7 billion in cash and another $7.4 billion through a bond exchange.

Sheva Levy of the firm Ernst & Young, which also advises the oversight board, said in response to questions from Hein, that the decision against cutting public pensions of more than $1,500 per month should have an impact of $69 million on average on the treasury.

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