Articles Tagged with COFINA

A group of hedge funds, including Oaktree Capital Management LP and Glendon Capital Management LP, has filed a lawsuit against the federal government in the U.S. Court of Federal Claims. The hedge fund group are Puerto Rico bondholders who could suffer losses from bonds that were issued in 2008 to help the island’s retirement system, the Puerto Rico Employment Retirement System (ERS), stay afloat. Unfortunately, beginning in 2013, the ERS investments faltered, leading the pension system toward bankruptcy.

The hedge funds’ complaint comes after PROMESA, the federal oversight board that was appointed to help the island of Puerto Rico address its $73 billion of debt, placed the Commonwealth’s biggest public retirement fund under bankruptcy protection to help restructure $3 billion in pension obligation bonds (commonly called POBs).

The ERS’s bonds can be paid for by pension contributions that public employers make toward the retirements of their employees. The hedge fund plaintiffs thought that these payments would go to them first. However, in June, the federal oversight board approved legislation to transfer these employer contributions beyond the pension system and away from these creditors. Now, the hedge funds want a court order determining that the move was illegal. They are seeking $3.1 billion in principal plus interest on the ERS bonds.

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Hedge fund Whitebox Advisors has filed a lawsuit against Bank of New York Mellon (BNY Mellon) over revenues from Puerto Rico’s sales tax bonds, which are commonly called COFINAs, that support $17 Billion of the island’s debt. Currently, the US territory is continuing to struggle to pay back the $70 Billion of debt it owes to creditors and BNY Mellon is a trustee for the island. (A number of hedge funds aside from the plaintiff, hold about $2.5 Billion in senior COFINA bonds, but they are not part of this case.)

In its lawsuit, brought in state court in New York, Whitebox Advisors accused BNY Mellon of breaching its duties to senior COFINA bondholders by continuing to make payments to junior creditors even after the US territory indicated that it wants to make concessions related to different kinds of debts. The hedge fund wants a court order stopping further payments to junior creditors, as well as a statement declaring that BNY Mellon has a conflict of interest. The plaintiff is also seeking monetary damages.

This week, the island is set to begin confidential talks with COFINA creditors as well as holders of competing general obligation debt. Creditors have until May 1 to arrive at mutually agreed upon settlements. The deadline was put into place, temporarily halting creditor lawsuits, to give the federally appointed oversight board a chance to work out a debt restructuring deal outside of court. At this moment, an extension to the freeze is unlikely.  After that, the board is allowed to try to place Puerto Rico into quasi-bankruptcy proceedings.

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A federal judge has ruled that general obligation bondholders in Puerto Rico may go ahead with a securities fraud lawsuit arguing that the U.S. territory’s government has to pay them what they are owed even as it pays off other bondholders and workers and restructures its nearly $70 billion of debt. U.S. District Court Judge Francisco Besosa said the bondholders’ case could proceed despite a new law that has placed a stay on the majority of creditors’ legal actions brought against Puerto Rico.

Owners of general obligation bonds which includes individuals and hedge funds such as Monarch and Aurelius, are arguing that Puerto Rico general obligation bonds are supposed to be constitutionally guaranteed, therefore other Puerto Rico obligations cannot be paid before general obligation bondholders. Judge Besosa said that because the general obligation bondholders’ debt lawsuit does not seek to get any kind of payment from the territory or confiscate commonwealth property, the case should be exempted from the stay.

Following Judge Besosa’s ruling, creditors of COFINA bonds, Puerto Rico’s sales tax authority, are now asking a federal court to keep the island’s government from being told to redirect bond payments to the general bond holders. The COFINA plaintiff group, which includes funds holding more than $2 billion in debt and also hedge funds such as Canyon Capital and Goldentree, contend that the general obligation bondholders’ claims are “self-serving” and without merit.

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