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  #241  
Old 09-14-2018, 12:12 PM
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Mary Pat Campbell
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https://www.wsj.com/articles/the-pro...ers-1536879461

Quote:
The Protesters vs. the Bondholders
The oversight board for Puerto Rico has a careful balancing act.
Spoiler:
'Wanted" posters with my picture on them recently appeared all over the campus where I teach. As one of the seven members of Puerto Rico's financial-oversight board, I am, the posters claimed, a "mercenary" who "demands the blood of Puerto Rican people to pay rich Wall Street bondholders."

If the anonymous authors of the sepia-toned, Wild West-style posters could only meet a few of the "rich Wall Street bondholders," they might see my colleagues and me a little differently. Perhaps a virtual introduction will suffice.

Start with Aurelius, a prominent hedge fund with large holdings of Puerto Rico bonds. In a lawsuit against the oversight board, Aurelius claims the process by which we were selected violates the Constitution's Appointments Clause. According to Aurelius, the actions we have taken are therefore null and void. A federal district judge rejected this argument; Aurelius is appealing.

Why blow up the work of the board? Because we're trying to reduce Puerto Rico's $74 billion of debt. On May 3, 2017, we filed bankruptcy-like proceedings (known as Title III) on behalf of the Commonwealth of Puerto Rico, as Congress authorized us to do in the Puerto Rico Oversight, Management, and Economic Stability Act of 2016, known as Promesa. Title III stops creditors from trying to collect what they're owed while we and the creditors negotiate the terms of a plan of adjustment. This would all go up in smoke if Aurelius prevailed in court. The hedge fund presumably believed it could force Puerto Rico to pay during the chaos that would ensue.

Other bondholders complain about the five-year fiscal plan we have certified, which is based largely but not entirely on adjustments proposed by Gov. Ricardo Rossello. According to these creditors, the plan's cost savings and reforms (including "right sizing" of government and reductions in health-care costs) don't go far enough. They insist we also should use rosier projections of Puerto Rico's future economic growth, and of the amounts it can afford to pay creditors.

I'm certain the protesters who made the posters wouldn't agree. Other posters targeted Julia Keleher, Puerto Rico's education secretary and the architect of one of the most important reforms already initiated by Mr. Rossello: a tough but needed restructuring of Puerto Rico's education system that involves school consolidations and closings to improve educational outcomes.

The oversight board has for the past two years navigated between the protesters' and creditors' perspectives, based on a conclusion that Puerto Rico can't climb out of its fiscal morass unless every constituency bears some of the sacrifice. The debt needs to be restructured, the cost of government reduced and pensions reformed.

Promesa instructed the oversight board to help "achieve fiscal responsibility and access to the capital markets." This can be translated as "make everyone unhappy, and help put Puerto Rico on a path to financial recovery, so that the oversight board will no longer be necessary." We seem to have achieved the first of these objectives. We're working hard on the second.

---

Mr. Skeel is a professor at the University of Pennsylvania Law School.
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  #242  
Old 09-16-2018, 03:35 PM
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Mary Pat Campbell
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https://fixedincome.fidelity.com/ftg...ddff695b_110.1

Quote:
Puerto Rico Oversight Board solicits debt report questions

Spoiler:
The Puerto Rico Oversight Board is soliciting questions on its report on the causes and development of the island’s debt crisis, which it released on Aug. 20.

About a week later the board announced that it had formed a Special Claims Committee to “pursue claims from the results” of the debt investigation led by Kobre & Kim.

The committee is holding a public hearing on the report on Sept. 18 in San Juan. It is soliciting questions concerning the report through 5 p.m. on Friday, Sept. 14. Questions can be submitted on the board’s website: www.oversightboard.pr.gov.

The public hearing will be held at 10 a.m., Sept. 18 in room 201 in the Puerto Rico Convention Center, 100 Bulevar Saint John, San Juan. The hearing will be streamed live on the board’s website and its audio will be available in both English and Spanish. Board members Andrew Biggs, Arthur González, Ana Matosantos, and David Skeel are on the Special Claims Committee.

The debt report includes a section that lays out numerous ways Puerto Rico’s bonds and the steps that led to their issuance may have run afoul of laws and regulations. However, it says that here are laws that bar both private investor actions under U.S. securities law and U.S. Securities and Exchange Commission enforcement actions when more than five years have passed since the issuance of the securities.

At this point this includes all Puerto Rico bonds except for the 2014 general obligation bond. The SEC has said, after completing its own investigation, that it won’t be taking enforcement action on the $3.5 billion GO.


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  #243  
Old 09-26-2018, 10:38 PM
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https://caribbeanbusiness.com/fiscal...investigation/

Quote:
Fiscal board holds hearing on Puerto Rico debt investigation

Spoiler:
SAN JUAN – The Special Investigation Committee of the Financial Oversight and Management Board for Puerto Rico held a public hearing Tuesday to discuss the findings in the report prepared by investigative firm Kobre & Kim on the island’s debt and its relationship to the fiscal crisis.

During the hearing, committee members Arthur González, Ana Matosantos and David Skeel heard from Kobre & Kim’s investigative team and their discussion of the report’s findings, which include a thorough analysis of potential causes of action, and numerous recommendations for Puerto Rico and its government officials, “to make sure the island never has to go through a debt crisis again,” the board said in a release issued after the hearing.

The report contains specific recommendations for various Puerto Rico debt-issuing government entities, as well as for the government’s financial management, budgeting and accounting practices, and public utilities’ governance reforms.

Some of recommendations included in the 600-page report that were highlighted by the board are: recomposing the boards of directors for public utilities to include a mix of governor-appointed and independent members, with longer and staggered terms across administrations; establishing independent rate boards for both the Puerto Rico power company and the Puerto Rico Water and Sewer Authority; amending the Puerto Rico Constitution so that tax securitization structured debt, such the Sales Tax Financing Corp.’s (Cofina), count toward the constitutional debt-limit calculation; adopting a statute that requires that the bonds or the issuer’s structure be validated by a court before the debt is issued; adopting a joint and modernized accounting and budgeting system that, among other mechanisms, incorporates automatic stop-pay controls for exhausted budget categories; permanently reducing the percentage of Puerto Rico assets in which on-island funds must invest, and having the Office of Government Ethics undertake targeted reforms, including the implementation of a whistleblower or bounty program.

“The serious evaluation of these recommendations is critical to ensure sure this never happens again,” Matosantos said in the release.

Kobre & Kim’s presentation was followed by a question and answer session, led by board investigative committee members, that incorporated questions submitted by the public and a moderated panel discussion of the potential reforms in governmental structures and debt-issuance procedures resulting from the report’s recommendations.

The panel’s moderator was Kenneth Rivera, president of the Puerto Rico Chamber of Commerce, and the panelists included Alvin Velázquez, associate general counsel of the Service Employees International Union and former executive coordinator of the Debt Audit Commission; Francisco Montalvo Fiol, member of the Private Sector Coalition; John Mudd, bankruptcy attorney and commentator; and Ramón Ponte, CPA and former president of the Puerto Rico Certified Public Accountants Society.

“The report found many troubling and problematic practices, as well as instances when bond proceeds were not used for the purposes for which they were issued. It also identifies issues that could lead to potential claims. Most importantly, it provides a solid foundation for the work that is to come: resolving the debt and fiscal issues before us, and for the government of Puerto Rico and its people to decide what changes to make to avoid this happening again,” Matosantos added.

The board has created a Special Claims Committee to evaluate report findings that could lead to potential claims and decide which ones to pursue. The committee comprises board members Arthur González, Matosantos, David Skeel and Andrew Biggs.


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  #244  
Old 09-28-2018, 05:57 PM
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https://www.nytimes.com/2018/09/26/b...erto-rico.html

Quote:
McKinsey Advises Puerto Rico on Debt. It May Profit on the Outcome.
Spoiler:
McKinsey & Company is advising the Puerto Rican government on a financial overhaul to lighten its crippling debts — a process that will determine how much money the bankrupt territory’s creditors recoup on their investments.

The giant consulting firm has millions of dollars riding on the outcome. The reason: McKinsey owns bonds issued by Puerto Rico.

That creates a potential conflict of interest between McKinsey’s client, which wants to save as much money as possible, and McKinsey itself, which wants to make as much money as possible on the bonds.

In a normal American bankruptcy proceeding, such a conflict would need to be disclosed to the court and to the public. But the legal framework established by Congress to deal with Puerto Rico’s financial collapse — the territory has $123 billion in debts — left out the disclosure rules.

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Affiliates of McKinsey revealed their investments in filings in federal court in Puerto Rico’s capital, San Juan. The filings were not made under McKinsey’s name, and were among nearly 165,000 bankruptcy claims.

McKinsey so far has received $50 million in fees to advise Puerto Rico’s federal oversight board on drafting a blueprint for the island’s fiscal affairs over the next decade. That plan projected how Puerto Rico’s economy would respond to the changes.

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It also determined how much money the island could afford to pay back to its bond holders. But the decision about which investors will receive how much was left to other institutions.

McKinsey, according to regulatory filings and court documents, is one of those bondholders. It owns at least $20 million — and possibly considerably more — of such securities.

“It’s a conflict of interest,” said Lynn M. LoPucki, a law professor at the University of California, Los Angeles, and the founder of the school’s Bankruptcy Research Database. “They are making decisions that will determine how much money is given to themselves.”

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A spokesman for McKinsey, D. J. Carella, said the firm had fully complied with all legal requirements, “including those regarding potential conflicts, and we will continue to do so.”

After The New York Times contacted McKinsey with questions about its investments, the federal oversight board became aware of the firm’s bond holdings, according to a board spokeswoman. The oversight board then requested that an outside ethics firm conduct a review of the situation, she said. The review found that McKinsey’s investment unit operated independently of its consulting business.

The Treasury Department asked during the Obama administration that the disclosure provision be left out of Puerto Rico’s restructuring law, said Kristina Baum, a spokeswoman for the House Committee on Natural Resources. No one considered the request controversial.

Traditionally, a key aim of filing for bankruptcy is to reduce the amount of money the borrower owes, in bonds or in loans, to outside parties. That often means that people and institutions owning bonds issued by the now-bankrupt entity get back only a fraction of what they had originally lent.

Exactly how much Puerto Rico’s bondholders will recoup is a central question facing the territory’s oversight board. Puerto Rico’s current debts include several different types of bonds, whose priorities are in dispute. The holders of those bonds are jockeying to get the greatest amount of the available money. McKinsey’s projections determined how much money is available to repay creditors.

“Whoever’s doing the numbers has tremendous power,” including over how much money will ultimately flow to McKinsey itself, Mr. LoPucki said.

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The biggest battle so far has been over some bonds that were marketed as nearly risk-free because they were backed by expected revenue from Puerto Rico’s sales tax. Holders of those bonds argued that they deserved almost all of their money back, but that meant that owners of other Puerto Rican bonds would get less.

Image
A bankruptcy claim listing Puerto Rican bonds held by Compass CSS High Yield, a fund owned by McKinsey. Two columns, highlighted for this photograph, show their face value, left, and the claim amounts.
In August, the dispute was resolved. The outcome was surprisingly generous to the owners of those sales-tax bonds. They were offered new bonds that would be valued at either 93 percent or 56 percent of what the old ones originally were worth, depending on the terms of the old bonds. (The amounts that investors in many other bonds will receive haven’t yet been settled.)

That was a boon for many investors, given that the bonds were trading for as little as 9 percent of their face value as recently as December.

McKinsey owns some of those bonds.

The investments were made through a subsidiary of the consulting firm, MIO Partners. MIO manages roughly $25 billion for McKinsey’s thousands of employees, alumni and retirees. MIO, in turn, runs three hedge funds — Compass CSS High Yield, Compass ESMA and Compass TSMA — that have reported owning the sales-tax bonds and are seeking $20 million in repayments, according to regulatory filings and bankruptcy claims in San Juan’s federal court.

Even if all of those $20 million in bonds were redeemed at the lower amount of 56 percent, that would be an $11.2 million payment for McKinsey. The actual amount will probably be bigger. Filings by Compass CSS indicate that it stood to recoup about $10 million of its $16.3 million claim. Compass CSS originally paid $4.5 million for its bonds, the filings show, so the McKinsey-owned hedge fund could more than double its investment.

Mr. Carella, the McKinsey spokesman, said its internal investments were managed by an independent unit, “separate from McKinsey’s consulting operations.”

Another McKinsey investment in Puerto Rico appears to be through a company called Whitebox Advisors, which as of 2016 managed about $100 million for McKinsey’s retirement plans, according to regulatory filings.

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Whitebox, through various investment funds, holds more than $140 million of Puerto Rican bonds. One of those funds is called Pandora Select, which as of 2016 held money on behalf of McKinsey.

In most other bankruptcies, McKinsey would have been required to disclose any Puerto Rican investments it had via Whitebox.

Whitebox manages money for a number of clients, and court records do not show how much of its Puerto Rican assets are held for McKinsey. A Whitebox spokesman, Gregory Marose, said the firm had properly disclosed its investments.

Mr. Carella acknowledged that McKinsey had attended some meetings with creditors. Over all, though, the consulting firm’s role is to “design a comprehensive fiscal plan” for Puerto Rico, he said. He noted that other companies were handling the negotiations that would determine how much creditors, including McKinsey, recovered.

In many other American bankruptcies, a potential conflict of interest like McKinsey’s — no matter how innocuous — would have to be disclosed to the public, the court and the Justice Department. The purpose of such disclosures is to protect the integrity of the bankruptcy process and avoid the appearance of inside dealing or cheating.

If a judge finds that the disclosed conflicts of interest could influence the proceedings, the judge can remove parties, such as consulting firms, from the case or force them to relinquish their fees.

When it won the job advising the oversight board, McKinsey signed a three-page Vendor Conflict of Interest Disclosure Certification. It states that McKinsey is not separately working with any people on the oversight board or any branch of the Puerto Rican government. But it says nothing about McKinsey’s own investments or other potential conflicts of interest.

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To comply with disclosure requirements, banks, law firms, appraisers, accounting firms and consultants that work for creditors have had to file more than 15,000 pages of paperwork about potential conflicts of interest.

Aside from the three-page certification, McKinsey has filed nothing.

That’s because Congress, as it wrote Puerto Rico’s restructuring law, excluded advisers to the territory’s oversight board from the disclosure requirements that applied to everyone else. It’s unclear why lawmakers created that exemption.

McKinsey this year has faced scrutiny for failing to disclose conflicts of interest in other bankruptcy cases. In May, Jay Alix, the founder of the restructuring firm AlixPartners, sued McKinsey in federal court in Manhattan, accusing the firm of concealing conflicts of interest in 13 bankruptcies in which it advised the companies.

This month, four members of Mr. Alix’s legal team — two academic experts on bankruptcy law and two retired bankruptcy judges — filed a sworn declaration in the case, calling McKinsey’s alleged evasion of disclosure rules “unprecedented.”

“We have never seen anything like it,” they wrote. “We have seen many cases in which a professional has negligently, recklessly or even intentionally failed to disclose a connection. But in our collective experience, no professional has ever made the conscious decision not to specifically identify any of its connections.”
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  #245  
Old 10-05-2018, 10:40 AM
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https://uk.reuters.com/article/usa-p...-idUKL2N1WK13T

Quote:
Bond insurers renew push for Puerto Rico electric agency receiver

Spoiler:
Oct 4 (Reuters) - Bond insurance companies that were not part of a preliminary deal to restructure debt issued by the Puerto Rico Electric Power Authority (PREPA) have relaunched litigation seeking a receiver for the bankrupt agency.

The move could signal that Puerto Rico has a ways to go to reach a final deal that includes the insurers.

A motion filed late on Wednesday in U.S. District Court in Puerto Rico by National Public Finance Guarantee Corporation, Assured Guaranty Corp, Assured Guaranty Municipal Corp and Syncora Guarantee Inc asks the judge overseeing the U.S. commonwealth’s bankruptcy case to allow another federal judge to appoint an independent professional to take over the utility’s operations.

“PREPA must be led by a receiver, free from impermissible political influence, with experience and proven expertise managing public utilities in the best interests of all of its constituents,” the court filing stated.

U.S. Judge Laura Taylor Swain last year struck down a previous receiver bid by bond insurers, only to have an appeals court remand the matter back to her in August. The latest motion points to PREPA’s “abysmal” efforts to collect almost $3.4 billion in accounts receivable, a revolving door at PREPA’s helm, and the agency’s “notoriously and catastrophically deficient” response to hurricanes Irma and Maria, which struck the island in September 2017.

The insurance companies, which guarantee payments on about 27 percent of PREPA’s $8.3 billion of outstanding bonds, claim they have statutory and contractual rights to obtain a receiver after the utility began defaulting on bonds and filed for bankruptcy last year.

The head of the Puerto Rico Fiscal Agency & Financial Advisory Authority, Christian Sobrino, stated on Thursday that “the motion rehashes many of the same arguments previously raised by the monoline insurers and is based on false and stale information.”

He added that PREPA’s current leadership “is focused on improving operations and continuing to address the impacts of the hurricane.”

There was no immediate comment from Puerto Rico’s federally appointed oversight board, which filed a form of bankruptcy in 2017 to restructure the island’s $120 billion of debt and pension obligations.

Meanwhile, local media in Puerto Rico reported on Thursday that Governor Ricardo Rossello and PREPA plan to cut electric rates for residents.

The insurers were not part of a tentative deal reached in July with a group of bondholders who own more than $3 billion of PREPA debt. That deal, which currently falls short of the creditor participation threshold needed for court approval, would exchange existing PREPA bonds for new debt and link future payments to the island’s economic recovery.

Puerto Rico also has deals in the works to restructure debt issued by its bankrupt Sales Tax Financing Corporation, known as COFINA, and its defunct Government Development Bank.

Despite the renewed motion, Assured said it “stands ready, and would prefer, to work cooperatively with the Financial Oversight and Management Board for Puerto Rico to consensually appoint a receiver for PREPA.”


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