Puerto Rico’s Legacy Bondholders Claim Priority
General obligation bondholders splinter as Puerto Rico heads toward next debt restructuring
Monarch Alternative Capital, GoldenTree Asset Management and Whitebox Advisors have formed a committee to differentiate themselves from other general obligation bondholders. PHOTO: ALVIN BAEZ/REUTERS
Hedge funds that own Puerto Rico general obligation bonds are fracturing into competing groups as they jockey for priority in the U.S. territory’s financial restructuring.
Monarch Alternative Capital LP, GoldenTree Asset Management LP and Whitebox Advisors LLC have formed a committee to differentiate themselves from other general obligation bondholders whose claims are in dispute, according to court records filed Tuesday.
The committee’s formation is partly a reaction to Puerto Rico’s financial overseers, who are taking steps to favor some general obligations over others. Last month the oversight board running Puerto Rico’s bankruptcy questioned the validity of $6 billion in general obligations, saying they layered more debt on the territory than its constitution allows.
The disputed bonds were sold after March 2012 and include Puerto Rico’s 2014 sale of $3.5 billion of high-yielding general obligations, the municipal market’s largest-ever junk-bond issuance.
Monarch, GoldenTree and Whitebox own nearly $800 million in general obligation debt that was issued before March 2012 and isn’t directly caught up in the board’s challenge.
The group’s lawyer, Susheel Kirpalani, said the funds would fight to enforce the “lawful priority status” of these “vintage” bonds, which are backed by a guarantee in Puerto Rico’s constitution and by rent payments for public buildings.
The bondholders are splintering in anticipation of new restructuring talks after Puerto Rico wrapped up a deal that wiped out $6 billion in other bonds backed by sales taxes. With that settlement now complete, the board is turning to other core government debt for concessions.
GoldenTree and Whitebox were among the sponsors of the sales-tax debt settlement, which saved Puerto Rico $450 million a year while earning them and other senior bondholders hundreds of millions of dollars in profit.
The board is following a strategy pioneered by the city of Detroit, which argued during its bankruptcy that $1.5 billion in bonds it sold were invalid because they breached Michigan’s municipal-borrowing limits. Those bondholders were paid 14 cents on the dollar when Detroit emerged from court protection, far lower than the recoveries for top-ranking city debt.
While a restructuring plan for Puerto Rico’s general obligations isn’t expected to be proposed for months, the formation of an additional committee gives the board another potential negotiating partner.
A group of constitutional bondholders including Aurelius Capital Management LP and represented by the law firm Paul Weiss has been locked in battle with Puerto Rico since its 2016 default. More recently, a group of general obligation and Public Buildings Authority bondholders hired lawyers from Morrison Foerster, according to court records.
A spokeswoman for the board had no immediate comment. A spokesman for the Aurelius bondholder group declined to comment.
By driving down Puerto Rico’s $125 billion debt load, the board is hoping to free up money for infrastructure investments and cope with the continued loss of island residents moving to the U.S. mainland.
Write to Andrew Scurria at Andrew.Scurria@wsj.com