Category: Puerto Rico

  • Aurelius v. Puerto Rican Control Board (or “Do Activist Hedgies Add Value?”)

    Posted by

    Mitu Gulati

    This post draws considerably from research on Puerto Rico and its current constitutional status with Joseph Blocher (see here).

    Tuesday was oral argument day at the Supreme Court in the battle between the Puerto Rican Control Board and a big bad hedge fund, Aurelius.  Aurelius, zealous defender of the constitution that it is, had brought a challenge to the constitutionality of the Control Board. The claim being that the failure of President Obama and the then Congress to follow the strictures of the Constitution for the appointment of principal officers of the federal government (nomination by the President, followed by Senate confirmation) made the Board and all its actions invalid.

    I am not a constitutional scholar and don’t have any desire to be one.  Still, the basic issue here seems fairly simple:  Are the members of the Control Board principal federal officers?

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  • Puerto Rico (A Quick Take, Part II)

    Posted by

    Stephen Lubben

    Coen, Andrew. The Bond Buyer; New York, N.Y., 30 Sep 2019:

    Assured Guaranty, which insures a large amount of Puerto Rico debt, came out against the plan.

    “Assured Guaranty does not support this plan of adjustment as it is premised on a number of terms that violate Puerto Rico law, its constitution and PROMESA," said Assured spokesperson Ashweeta Durani.

    Are we sure the first and second "violations" are relevant for these purposes?

  • Puerto Rico (A Quick Take)

    Posted by

    Stephen Lubben

    So the debt restructuring plan is out. The New York Times indicates that the Oversight Board aimed to put the Commonwealth's debt at "less than" the average of the ten most indebted states. Not exactly a "fresh start" there, is it? Why not peg the debt to that of the average state?

    Nonetheless, we can expect the bondholders to complain about even the relatively modest haircut they are slated to take, and they will surely note that the pensioners are taking less of a cut. Of course, the pensioners are in some sense funding the bondholder's recovery, since they are a key factor in keeping the Commonwealth's economy alive.

    Normally we say that the liquidation baseline does not work in chapter 9 cases, because there is no real way to "liquidate" a municipality. But if the bondholders push too hard, they may test that assumption with regard to Puerto Rico. Lightly populated Caribbean islands do not support large debt loads, or even 63% recoveries to bondholders.

  • Trump, Denmark and Greenland:  What Next?

    Posted by

    Mitu Gulati

    (This post draws directly from ideas from co authored work with Joseph Blocher; and particularly the numerous discussions we have had about the incentives that a market for sovereign control might create for nations to take better care of their minority populations in outlying areas (e.g., the US and Puerto Rico).  Mistakes in the discussion below, however, are solely mine).

    It seems like forever ago, but it has only been a few weeks since the news came out that our esteemed chief executive wanted the US to purchase Greenland.  The notion was widely ridiculed in the press and provided wonderful fodder for comics around the globe.  But as people looked beneath the surface, it quickly became apparent that there was nothing in international law that prohibited the purchase and sale of sovereign control over a territory.  Where Trump was wrong was in his assumption that he needed to purchase Greenland from the Danes.  Under post World War II international law, however, a former colony such as Greenland has the right of self determination.  To quote the Danish prime minister, responding to Trump, “Greenland is not Danish. Greenland belongs to Greenland.”

    The Danish PM also said “I strongly hope that this is not meant seriously.”  And, from her perspective of apparently wanting to keep the status quo of Greenland being part of Denmark, it makes sense that that’s what she hopes.  But let us focus on the words “Greenland is not Danish. Greenland belongs to Greenland.” If one thinks about those words just a little, they mean that Trump’s purchase (and maybe he should start calling this a “merger”, since that seems more polite) is perhaps a lot easier to execute than he initially thought.

    Trump and any other suitors that Greenland might have (Canada, China, Iceland, Russia, etc.) need to only focus their attention on making the Greenlanders happy; they don’t need to worry about the Danes. No need for Trump to do diplomatic trips to Copenhagen. Trips should be to Nuuk instead. After all, it is the approval of the 55,000 Greenlanders that he needs.

    How many Greenlander votes, specifically? (assuming that there would need to be a referendum first). International law doesn’t clearly say; but surely more than a majority – and ideally with a voting mechanism designed in such a way that the rights of the minority that might not want to be part of the merger being appropriately protected.

    The point is that if DJT and his supporters remain committed to the Greenland strategy – and it appears they do (see here) – the next step is will be to persuade the people of Greenland that this merger is in their interest. That way, the next time Trump offers a merger deal to the roughly 55,000 Greenlanders, they will react with enthusiasm rather than horror.  One would expect, therefore, to see the US taking steps to mount the charm offensive in Greenland. And, as it turns out, preliminary steps in this direction have already been announced with the US planning to open a consulate in Greenland and engage in various outreach programs as part of its broader arctic charm strategy (here).

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  • PROMESA heads to the U.S. Supreme Court?

    Posted by

    Melissa Jacoby

    In February 2019, the United States Court of Appeals for First Circuit held that the selection process of the Oversight Board in PROMESA, the rather bipartisan Puerto Rico debt restructuring law (and more), is unconstitutional. The reason: its members were not selected with advice and consent of the Senate, in violation of the Appointments Clause. In other words, it held that the Appointments Clause applies even when Congress created the positions through plenary power over territories, and that Oversight Board members constitute "Officers of the United States." The First Circuit also used the de facto officer doctrine to avoid a complete do-over; it did not dismiss the Title III petition of Puerto Rico (parallel to the filing of a bankruptcy petition), it did not invalidate the already-taken acts of the Board, and the Board could continue to act, at least until the court's stay runs out (originally 90 days, then extended to July 15). 

    Given that last remedial twist, even the prevailing parties found reasons to dislike the First Circuit's ruling. Like the Jevic case, the PROMESA dispute invites unlikely bedfellows. Joining Aurelius Capital Management in challenging the First Circuit's ruling on the remedy is the labor union UTIER. They likely have little in common other than wanting a new Oversight Board, or, even better, no Oversight Board. A full bouquet of certiorari petitions followed, including one by the United States/Solicitor General predicting dire consequences if the Appointment Clause ruling stands. On June 20, 2019, the Supreme Court consolidated and granted certiorari on the various petitions. Argument is to take place in October.

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  • Ouch. (Puerto Rico Edition)

    Posted by

    Stephen Lubben

    The First Circuit responds to the Oversight Board's request for a stay until the Supreme Court can rule on their cert. petition, with regard to the Constitutionality of the Board's appointment (emphasis added):

    ORDER entered by Juan R. Torruella, Appellate Judge; Rogeriee Thompson, Appellate Judge and William J. Kayatta, Jr., Appellate Judge: In accordance with Federal Rule of Appellate Procedure 41(b), this Court ordered the withholding of its mandate in this case for a period of 90 days so as to allow the President and the Senate to appoint members of the Financial Oversight and Management Board for Puerto Rico in accordance with the Appointments Clause. With that 90-day stay set to expire on May 16, 2019, the Board informs us that the President has announced his intent to nominate the current members to serve out their terms, but that the nominations have not yet gone to the Senate. The Board has also filed, apparently with no sense of any urgency, a petition for certiorari. The Board seeks a further stay of our mandate, this time under Federal Rule of Appellate Procedure 41(d)(1), which would stay the mandate indefinitely until the Supreme Court's final disposition of the case. That request is denied. Instead, the stay of our mandate is extended sixty (60) days, until July 15, 2019.

  • Puerto Rico, the Board, and the Appointments Clause

    Posted by

    Stephen Lubben

    As many will have seen in the press, the First Circuit has said that PROMESA's Oversight Board was appointed in violation of the Appointments Clause. In short, while PROMESA allowed President Obama to appoint members of the Board without Senate confirmation, the Court says such confirmation was required.

    The Board has decided to appeal to the Supreme Court, and the First Circuit's decision is on hold for 90 days. But what happens in 90 days?

    In short, chaos. The title III "bankruptcy" cases for Puerto Rico and its affiliates are all run by the Board. Without the Board, the cases would seem to grind to a halt. If they remain that way for an extended period of time – and who really thinks this Congress and this President are going to get their act together in 90 days? – the District Court may have little choice but to dismiss the cases.

    The appeal was brought by old-friend Aurelius. They presumably assume that they will get better treatment outside of title III.

    But is that right? Maybe Congress will decide to enact a streamlined insolvency process for Puerto Rico, one that "cuts to the chase." After all, even the current President (hardly a friend to the Commonwealth) once suggested it might be necessary to simply cancel Puerto Rico's debt. 

    Congress has a lot of power under the Bankruptcy Clause – and perhaps even more under the Territories Clause. Be careful what you wish for, and all that.

  • CDS Strikes Again (Aurelius and Windstream)

    Posted by

    Stephen Lubben

    Long ago I warned that the growth the of the CDS (credit default swap) market represented a threat to traditional understandings of how workouts and restructurings are supposed to happen. The recent Windstream decision from the SDNY shows that these basic issues are still around, notwithstanding an intervening financial crisis and resulting regulatory reform.

    Windstream is a corporate group in the telecommunications sector. In 2013 it issued some senior unsecured notes due in 2023. Under the indenture for those notes, specific legal entities in the Windstream group agreed not to engage in any sale-leaseback transactions, presumably to maintain legal title to the groups’ assets available for the noteholders to collect against.

    But the indenture did not prohibit the creation of new affiliated entities, nor did it bind such new entities to the prohibition on sale-leasebacks. Windstream did exactly that – popping up a new holding company to enter into the lease, and dropping down a new REIT subsidiary to be the owner of the leased assets. A clear end-run around the probable “intent” of the parties (whatever that means in the context of a bond indenture), but not against the express terms of the indenture, which legions of New York Court of Appeals decisions suggest is the only place to look for intent when reading an indenture.

    Nonetheless, Aurelius Capital Master, Ltd., a fund managed by Aurelius Capital Management, LP and its affiliates, instructed the indenture trustee to bring suit against Windstream for breaching the terms of the indenture. As the holder of more than 25% of the notes, the Aurelius fund was entitled to give the trustee such instructions.

    As many Slips readers will already appreciate, Aurelius is well-known in the restructuring community for its fondness for a robust sort of litigation. To put it mildly. And it is alleged that Aurelius has fully hedged its Windstream position with CDS, meaning that it can afford to be quite aggressive, because damage to Windstream will actually increase the value of the CDS position.

    I’ll try to condense this as much as possible, but readers can see that we are headed into one of my longest posts in a while …

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  • The Commonwealth and the GOs, part 2

    Posted by

    Stephen Lubben

    In my last post, I noted that the joint committee-Board objection to the 2012 and 2014 Puerto Rico GOs was at least plausible, and thus is likely headed for more extensive litigation. As Mark and Mitu have also noted, it also matters a good deal that the objectors also have arguments for why the claim on the bonds is not replaced by a similar claim for unjust enrichment or the like (although we might wonder if such a claim would enjoy the special constitutional priority the GOs do, if we think that priority really matters in a sovereign/muni bankruptcy process).

    This past weekend, the FT's John Dizard quoted a hedge fund type as saying that the objectors' argument about the Building Authority's leases (see my prior post) was "nonsense." Not a lot of deep analysis there, but it does confirm there is a fight ahead. And we can assume that the Commonwealth's words will be used against it – after all, at the time of issuance, Puerto Rico and its agents undoubtedly said lots about how assuredly valid these bonds were.

    The obvious conclusion is that the objectors have made this move as an opening shot in a broader play to negotiate a haircut with the GOs. After all, they look like they are almost done dealing with the COFINA debt, the other big chunk outstanding.

    Sure. But what I find really interesting is the more subtle point that with this move, the objectors have also opened up some space between the GOs as a class. That is, presumably the non-challenged GOs will not have to take as severe of a haircut if $6 billion has already been knocked off the GO total. If I'm a holder of 2011 GOs (which I'm not, btw), I might then start to think that I don't really mind if the objectors win. And thus intra-GO warfare might break out.

    Some asset managers are also going to face challenges if they have 2011 GOs in one fund, and 2014 GOs in another. And then there is Assured Guaranty Municipal Corp., which insured both the 2011 and 2012 (but not the 2014) … 

  • Puerto Rico’s Audacious Move: Can it Cut its Debt by $6 bn?

    Posted by

    Mark Weidemaier

    Mitu Gulati & Mark Weidemaier

    Last week, the Government of Puerto Rico, acting through the Financial Oversight and Management Board (and in conjunction with the creditors’ committee), filed a claims objection seeking to invalidate roughly $6 billion of its General Obligation debt. The reason is that the government allegedly borrowed in violation of the Debt Service Limit and the Balanced Budget Clause of the Puerto Rican constitution. Stephen’s recent post on this subject discusses the merits of this argument in some detail. In this post, we are especially interested in the question of restitution. The Commonwealth doesn’t get much benefit from invalidating loans unless it also avoids the obligation to pay restitution (i.e., return the purchase price). So the objectors make the additional argument that bondholders have no equitable right to restitution under a theory of unjust enrichment.

    There is some precedent for the objectors’ arguments in similar contexts, although not a lot of it. Some of the important cases, such as Litchfield v. Ballou (1885), are also very old. However, at least one law review article—a student note in the North Carolina Banking Institute journal (here)—squarely addresses Puerto Rico’s argument, ultimately concluding:

    How can Puerto Rico’s penalty for illegally borrowing above its means be that it is allowed to declare the debts void and keep the money for itself? Despite the manifest unfairness of such a result, the applicable law indicates that this is likely the proper legal result.

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