A battle of hedge funds, and their competing interests, has erupted in Puerto Rico over the last few weeks. This week, hedge funds Tilden Park Capital Management LP, Whitebox Advisors LLC, Merced Capital LP, and GoldenTree Asset Management LP filed a motion asking a court to impose a legal stay that would delay the lawsuit filed by general obligation bondholders that want Puerto Rico to stop directing sales-tax revenue away from the general fund. These hedge funds that submitted the motion collectively hold about $2 billion of tax revenue bonds, which are called COFINA bonds, locally.
Meantime, the general obligation bondholders that filed the lawsuit are also hedge funds. They include entities under the management of Aurelius Capital Management, FCO Advisors, Autonomy Capital, Covalent Partners, Monarch Alternative Capital, and Stone Lion Capital Partners. Earlier this month, they asked a court to stop the island from using sales-tax revenue to pay back COFINA debt. Those funds believe that the sales tax revenue should pay back the general obligation bonds first because Puerto Rico’s constitution states that general obligation should be repaid before other debt. However, the hedge funds holding the COFINAs that are requesting the legal stay are arguing that COFINA’s share of the sales-and-use-tax should not be “subject to clawback” in the event of a payment shortfall of the general obligation bonds.
This fight is playing out at the same time the U.S. Government is trying to help the U.S. Commonwealth with its financial crisis. PROMESA, which stands for the Puerto Rico Oversight Management and Economic Stability Act, is the new law that includes the legal stay that the CONFINA holders want imposed. The stay postpones creditor lawsuits against the island until February 15, 2017 in order to give Puerto Rico time to work out how to repay the $70 billion of debt it owes. Although Puerto Rico is way overdue on $1.8 billion of principal plus interest payments, this includes what the island owes on general obligation bonds, the Commonwealth paying back COFINAs.
Last week, the newly appointed Puerto Rico Oversight Board, authorized under PROMESA, asked a judge in the United States District Court for the District of Puerto Rico to continue freezing litigation in four debt cases against Puerto Rico Governor Alejandro Garcia Padilla and the island. Giving its reasons for the request to continue the litigation freeze, the oversight board said that it believes allowing the litigation to continue now gets in the way of its congressional mandate, which is to help the island deal with its debt and restructure its finances.
While all this plays out in the courts, the Puerto Rico bond fraud cases against brokerage firms such as UBS Puerto Rico (UBS-PR), Banco Popular, and Banco Santander (SAN) continue to make their way to the Financial Industry Regulatory Authority for arbitration proceedings. Unfortunately, many individual investors suffered huge losses because they invested in Puerto Rico municipal bonds, which dramatically dropped in value three years ago.
Our Puerto Rico bond fraud lawyers and closed-end bond fraud attorneys are continuing to work with investors in the US mainland and in Puerto Rico to recover their investment losses. Many investors say they were not apprised of the true risks involved in these municipal bonds. Some of them were even encouraged to come up with more money so they could invest more. Contact Shepherd Smith Edwards and Kantas, LLP today.
Hedge Fund Fight Over Puerto Rico Sales-Tax Revenue Heats Up, Bloomberg, October 24, 2016
Hedge Funds Holding Puerto Rico General Obligation Bonds File Lawsuit, Stockbroker Fraud Blog, October 11, 2016