Mural in Old San Juan (Photo: Derek Seidman)
Vulture funds that took advantage of Puerto Rico’s debt crisis are now set to profit heavily, and they have a good friend helping them out: the oversight board.
In February, the oversight board filed its second version of the central government’s plan of adjustment in federal court. The approval of a plan of adjustment is the last step to formalize a new deal with bondholders and get the government out of bankruptcy. The plan integrates the recent February agreement reached with a group of bondholders, which includes an increase in the payment of possibly illegal debt, and cash payments with money that could be used for the recovery of the country. It also includes an exchange of central government bonds for COFINA bonds, which implies that vulture funds will have a source of secured repayment and greater protections in the case of a second bankruptcy.
The amended plan of adjustment still includes the 8.5% pension cut for over 65,000 retirees.
With no support from the local governor or the Puerto Rican legislature, the oversight board has been luring vulture investors by offering hefty payments that are secured even in the case of another bankruptcy.
Four vulture coalitions currently support the plan of adjustment. According to reports filed in court in February this year, the investments of these four coalitions total over $7.7 billion, or 41% of the central government bonds included in the plan of adjustment:
- Lawful Constitutional Debt Coalition: $2,043,924,000
- QTCB Noteholder Group: $1,891,663,120
- Ad Hoc Group of Constitutional Debtholders: $2,580,135,000
- Ad Hoc Group of General Obligation Bondholders: $1,252,872,012
Of these groups, the Lawful Constitutional Debt Coalition has been paying for ads both on the radio and in newspapers, such as El Nuevo Día, in favor of the Board’s adjustment plan.
Who are these vulture funds?
They razed COFINA, now they are coming for the central government
The Lawful Constitutional Debt Coalition was formally constituted in February 2019. Its origin was in response to the oversight board’s challenge filed in court that questioned the legality of $6 billion of general obligation bonds as violating the constitutional debt limit. The Coalition supported the oversight board’s challenge, implying that its investments were in uncontested bonds (hence the name of the coalition).
Thus, a kind of civil war began between the vulture funds. Those who had challenged bonds, like the Group of General Obligation Bondholders, opposed the oversight board because if the court declared their debt illegal, they would lose everything. On the other hand, the Coalition stood to gain from the Board’s legal challenge because it jeopardized the position of the other vulture funds competing with them. Less money for the others, more money for them. The Coalition took advantage of the challenge to strengthen its position at the negotiating table and reached, before the rest, a first agreement with the oversight board on May 31, 2019. The second agreement integrated into the new adjustment plan substantially increases the repayment for these funds.
- GoldenTree Asset Management
- Whitebox Advisors
- Taconic Capital Advisors
- Aristeia Capital
- Monarch Alternative Capital
- Farmstead Capital Management
- FCO Advisors
- Marble Ridge Capital
The first four vulture funds on this list were part of the COFINA plan of adjustment, where, in conjunction with the rest of the COFINA Senior Bondholders Coalition, they obtained, according to our estimates, over $1 billion in profits on their investments in senior bonds. In addition, GoldenTree, Taconic, and Aristeia took advantage of the collapse of bond prices as a result of the destruction brought by Hurricane Maria. Reports of their investments show that from October 2017 to April 2018 the trio almost tripled its subordinate COFINA bonds, from $245 million to over $729 million. The average price on that period for COFINA’s subordinated bonds was around 15 cents per dollar. The plan of adjustment repaid them 56 cents per dollar.
The huge investments since the first quarter of 2018 in central government bonds by some of the members of the Coalition demonstrates their confidence in reaching a major agreement with the oversight board:
|Ownership of Central Government Bonds 1st Quarter ’18 – February ‘20|
|Fund||1st Quarter ‘18||February 2020||Increase|
We lack information on the investments of the rest of the members of the Coalition during 2018. What we do know is that the Coalition as a group has been increasing its possession in central government bonds since its formation in February 2019 to the present, from $777 millions to over $2 billion.
Estimating the earnings of the vulture funds is a difficult task not only because of the lack of public information, but also because of the lack of precision in their reports submitted to the court. These reports make no distinction between general obligation bonds and the bonds of the Public Buildings Authority, nor between bonds whose legality has been questioned and bonds that have not been contested. All these bonds are identified as “constitutional debt.” However, their prices have behaved differently in the market. Recently, one of the parties litigating in court filed a motion asking the court for greater accuracy in these reports. If the court approves it, then we would have more precise numbers to make better estimates.
Members of the Coalition have not only invested in bonds but have been buying properties in Puerto Rico.
Monarch, for example, is one of the owners of the Hyatt Regency Grand Reserve Hotel Puerto Rico in Río Grande (formerly Grand Meliá). This hotel was built in the 1990s in Punta Miquillo, a small peninsula that was part of the Espiritu Santo River Nature Reserve but was excluded from the reservation thanks to a resolution from Puerto Rico’s Planning Board in 1995. Recently, the owners announced the reopening of the hotel and the future construction of new projects throughout the peninsula, in another possible disastrous impact for the reserve. This is the same natural reserve that is also being greatly impacted by the constructions of investor John Paulson as part of the St. Regis Bahia Beach Resort hotel complex.
Monarch also has another business in Puerto Rico in alliance with Taconic Capital. The two firms acquired 2.2 million square feet of industrial warehouses in San Juan’s metropolitan area, in a transaction valued at $200 million. The administrator of these properties is a joint venture between Monarch and Taconic called Puerto Rico Industrial Solutions Management (PRISM).
According to the PRISM website, the president and chief operating officer of the company is Héctor J. Del Río. While the profile mentions his past experiences in the private sector, it omits that Del Río has been a member of the board of directors of the Puerto Rico Aqueduct and Sewer Authority (PRASA) since December 2017, and has served as its chairman since August 2018.
Moreover, that same month of August 2018, one of the owners of PRISM, Taconic Capital, reported in court that it held over $97.8 millions of PRASA bonds. This could represent a conflict of interest if at the moment of Del Río’s appointment as PRISM’s president Taconic still had PRASA bonds, since PRASA’s board of directors discusses issues related to the fiscal plans and debt restructuring. From the public documents we cannot know if Taconic continues to be a PRASA bondholder.
Lawyers and lobbyists to get the millions
To advance its interests, the Lawful Constitutional Debt Coalition uses the legal services of Quinn Emanuel Urquhart & Sullivan, an internationally recognized law firm that has over 800 lawyers. Their motto on their website reads: “Litigation is a zero-sum game. There is a winner and a loser. We know how to win.” Certainly, the more Quinn Emanuel’s clients earn, the more the people of Puerto Rico lose.
Quinn Emanuel was also the legal representative of several vulture funds since June 2015, and its attorneys represented the COFINA Senior Bondholders’ Coalition during COFINA’s restructuring negotiations. Susheel Kirpalani is the legal team leader of the vulture funds. In April 2016, he deposed in a public hearing in the United States Congress to promote the approval of PROMESA and the creation of the oversight board.
As part of Quinn Emanuel’s strategy to achieve the COFINA’s plan of adjustment, which required a bill passed by the legislature, they employed Politank, a lobbying firm led by Francisco Domenech, the former campaign director for Resident Commissioner Jennifer González during the elections of 2016.
A legal conflict between Politank and Susheel Kirpalani caused Politank to filed a lawsuit in federal court against vulture funds and Kirpalani. Through this lawsuit we have a window on how businesses work between investors, lawyers and lobbyists.
In October 2015 Quinn Emanuel hired Politank’s services to advise and lobby in favor of legislation to achieve COFINA’s debt restructuring. As part of the agreement Politank would receive $55,000 per month. In addition to the monthly payments, the agreement established a “success fee” that depended on the amount repaid by COFINA to the vulture funds. The greater the profits, the greater the success fee, or, in other words, the more the people of Puerto Rico had to pay the vulture funds, the greater the lobbyists would have. If the recovery of bondholders was 95% or more, the fee would be $3 million. If it was 92.5%, it would be $2.5 million; if it was 90%, it would be $1,275 million.
Documents filed in court show that Politank had the services of Kenneth McClintock, who chaired the Senate (2005-2008) and was secretary of state (2009-2012), and Guillermo San Antonio Acha, who was the electoral commissioner of the Popular Democratic Party (2014-2017), and Carmen Yulín’s director of the transition committee when she took the reins of the Municipality of San Juan.
Although they do not appear in the Senate lobbyists registry, we do not know if Quinn Emanuel and the vulture funds are using lobbyists to push for the approval of the new central government plan of adjustment since said registry often does not include all lobbyists that are operating.
The other firm hired by the Lawful Constitutional Debt Coalition is the Puerto Rican law firm Reichard & Escalera, who since August 2015 also advised the vulture funds during the COFINA’s restructuring. The legal services for the Coalition are led by Rafael Escalera, co-founder of the firm. Escalera was appointed in May 2013 by then Governor Alejandro García Padilla as a member of the governing board of the University of Puerto Rico (UPR), a position he held until April 2016. UPR is one of the public institutions that has most budget cuts, when the oversight board cut more than half of his budget. If the central government’s plan of adjustment is approved and Escalera’s clients make huge profits, the government’s General Fund would have fewer resources to allocate to UPR in the future.
With no support from the governor, or the legislature, the oversight board desperately needs vulture funds to support the latest debt agreement. To lure them, it has offered millions in profit to the funds that are now rallying around this deal. However, the oversight board needs a bill approved by the legislature to make the adjustment plan feasible.
The opposition can use this standoff to block the approval of the plan of adjustment. To fight back, retirees have been organizing for months, and more than a thousand pensioners came together on February 22nd to organize their next steps to stop the pension cuts. Time will tell who will prevail.