Bondholders sue GDB to stop ‘preferential transfers’

Written by  //  April 5, 2016  //  Government  //  No comments

GDB President Melba Acosta.

GDB President Melba Acosta.

A group of holders of outstanding bonds of the Government Development Bank for Puerto Rico filed a complaint in the U.S. District Court for the District of Puerto Rico Monday seeking to enjoin certain transfers of assets by GDB they claim are prohibited under Puerto Rico law.

The group controls about $3.75 billion of the GDB’s outstanding bonds and are involved in restructuring talks with the financially crippled public agency.

In a statement they said they are “supportive of GDB’s ongoing efforts to restructure its finances in a manner that will allow it to continue to operate and serve the Commonwealth’s agencies and municipalities, which provide essential services to the people of Puerto Rico.”

However, they said that in light of the recent findings of the U.S. District Court for the District of Puerto Rico and the Office of Financial Institutions of Puerto Rico regarding GDB’s insolvency, it is “imperative that GDB’s assets and liquidity be preserved and that preferential payments in violation of Puerto Rico law cease to permit restructuring discussions to unfold.”

The complaint seeks the suspension of payments by GDB, except for withdrawals needed to maintain services essential to the public safety of the citizens of Puerto Rico or to pay the ordinary course operating expenses of GDB such as utilities, rent and employee wages.

Plaintiffs are funds managed or advised by Brigade Capital Management, LP, Claren Road Asset Management, LLC, Fore Research & Management, LP and Solus Alternative Asset Management LP. The group is represented by Davis Polk & Wardwell LLP and Vicente & Cuebas, as counsel, and by Ducera Partners, as financial advisor.

“The lawsuit filed today by a number of the Commonwealth’s creditors against the GDB, which seeks an injunction to bar GDB from fulfilling its official duties as depositor of the central government and other governmental entities, is further evidence of the toll the inaction from Congress continues to take on all involved,” said GDB President Melba Acosta.

She said the central claim of GDB’s creditors — that GDB has knowingly withheld financial information to prefer certain depositors over its bondholders — is wholly false and without basis in fact.

“While GDB will respond to the complaint in full through proper legal means, it is important to note that GDB has continued to fulfill its official roles as government depositor, fiscal agent and financial advisor fully within the bounds of its enabling act and applicable law,” she said in a statement.

“Although the specific allegations set forth in the lawsuit are erroneous, it is clear that our creditors agree with us on one thing: Puerto Rico’s fiscal situation is dismal, the island’s debt is unpayable, and the need for a federal restructuring regime to help the Commonwealth on the road to recovery is acute,” she said.

She reiterated the government’s call for Congress to act immediately to grant Puerto Rico the broad restructuring authority needed to address its debt load and to prevent the crisis on the island from spinning further out of control.

“In the interim, GDB remains committed to working with its creditors, including the very group of creditors that are now litigants, towards a comprehensive solution to GDB’s precarious fiscal situation while allowing GDB to continue to serve its critical role for the Commonwealth as a whole,” she said.

In particular, GDB and its advisors intend to continue the negotiations with the creditors that have been publically announced, and “we hope that, despite the lawsuit, our litigating counterparties will be able to play a productive role in that process,” she said.

As the economic conditions in Puerto Rico continue to deteriorate without any relief in sight, the GDB — like all agencies of the Commonwealth — is faced with extremely difficult choices, and it is our responsibility to evaluate all options that may protect creditors’ ability to be repaid while ensuring that GDB keeps its doors open, Acosta added.

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