December 6, 2021

Volume XI, Number 340

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December 03, 2021

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Legal Highlights in Puerto Rico’s “Draft POS” for Upcoming General Obligation Bond Issue

Although Puerto Rico’s much-discussed sub-investment grade general obligation bond issue is not yet being marketed via an official preliminary official statement, it appears that a draft POS has been making the rounds.  The draft POS, dated February 28, 2014, has been posted on at least one website and has been referenced in Bloomberg news reports.

From a legal perspective, an initial review of the draft POS includes the following items of interest:

  • The bonds as offered will not be subject to acceleration upon default.  Accelerability is one of the items that had been mentioned on the buy-side wish list, as otherwise a payment default on a particular coupon or maturity would only entitle bondholders to institute remedial action for the payment of that particular coupon or maturity.

  • Unsurprisingly, there is a lengthy “Risk Factors” section, atypical for general obligation bonds but not for sub-investment grade bonds.

  • The draft POS indicates that Puerto Rico’s Secretary of the Treasury has exercised his new statutory authority to provide for application of New York law and to expressly agree to the jurisdiction of New York’s state and federal courts (as well as Puerto Rico’s) in any action relating to this issue of general obligation bonds. As we have previously discussed, this item was higb up on the buy-side wish list.  However, the draft POS indicates that “no assurance can be given that any such litigation will be accepted by or, once accepted, be continued in a New York court or federal court in New York if the particular court determines by law that it does not have jurisdiction over the Commonwealth or that it should be removed to a court in Puerto Rico, as being more suitable on grounds of judicial fairness to the parties involved.” Furthermore, the draft POS states that “[a]lthough a judgment from a New York court should be given effect in Puerto Rico pursuant to the full faith and credit clause of the U.S. Constitution, such a judgment must meet certain minimum requirements before a Puerto Rico court will give it effect” and that “[t]here is no assurance that any judgment from a New York court would be given effect by a Puerto Rico court.”

  • The draft POS acknowledges the priority status of debt service payments on Puerto Rico’s “public debt” under Puerto Rico’s constitution, but indicates that “public policy considerations relating to the safety and well-being of the residents of the Commonwealth, as well as procedural matters, could result in delays in the judicial enforcement of this remedy, and in limitations on the effectiveness of such remedy” and that “the remedies available to bondholders are dependent on judicial actions, which are often subject to substantial discretion and delay.”

  • The draft POS notes the “clawback” provisions relating to Puerto Rico revenues assigned to Puerto Rico Highways and Transportation Authority (“Highways Authority”), Puerto Rico Infrastructure Financing Authority (“PRIFA”) and Puerto Rico Convention Center District Authority (“PRCCDA”), but states that the availability of such assigned revenues for debt service on the general obligation bonds “is subject to there being no other ‘available Commonwealth resources’” and that “[i]t is not certain what steps a general obligation bondholder would be required to take or what proof such bondholder would be required to produce to compel the diversion of such funds from any such instrumentality to the payment of public debt, or how the necessary available Commonwealth resources would be allocated between each such instrumentality.”

  • As required under SEC Rule 15c2-12, the draft POS discloses that “the Commonwealth has failed to file the Commonwealth’s Annual Financial Report before the May 1 deadline in three of the past five years.”  The draft POS states that “[a]lthough the Commonwealth has implemented certain mechanisms to ensure timely compliance with its continuing disclosure obligations, there is no assurance that the mechanisms put in place will be effective in ensuring timely compliance.”

  • There is no reference in the draft POS to the designation of purchasers’ counsel to represent prospective purchasers of the bonds in assessing the legal risks, legal opinions, continuing disclosure rights and other legal matters relating to this unusual offering. The funding of purchasers’ counsel by Puerto Rico or the underwriters has been requested by some prospective bondholders.

©1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume IV, Number 64
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About this Author

Leonard Weiser-Varon Coporate and Finance Law Attorney Mintz Law Firm
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Len specializes in municipal and corporate debt transactions,  represents state sponsors and private program managers of Section 529 college savings programs and Section 529A (ABLE) disability savings programs, and is often invited to speak on securities and constitutional law issues impacting finance. He also regularly writes on public finance matters and has been recognized as one of the top public finance lawyers in Massachusetts in a peer survey by Massachusetts Super Lawyers.

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William W. Kannel, Bankruptcy Attorney, Mintz Levin Law Firm, Bankruptcy & Restructuring Insolvency & Creditor Rights Litigation Directors & Officers Litigation Chapter 9 & Municipal Insolvency Litigation
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Bill is a nationally recognized bankruptcy attorney with extensive experience in corporate and municipal reorganizations and debt restructurings both in and out of court. He represents creditors and debtors across a wide range of industries throughout the country in all phases of distressed debt negotiations, bankruptcy litigation, and distressed asset acquisitions. Bill is also recognized as one of the leading attorneys in the nation for his work representing bond trustees and bondholders in Chapter 9 bankruptcies and other governmental and municipal insolvencies.

Bill is the chair...

617-348-1665
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