It’s the Puerto Rico battle of the bondholders, round two. And once again, Aurelius Capital Management finds itself on the losing side.
Last year, Aurelius reached a settlement with a group of investment firms that led to a windfall for the competing creditors. Now that group is back battling Aurelius. This time, these funds have joined an official crisis-oversight board in claiming that some $6 billion in general obligation (GO) bonds issued after 2012 are in violation of Puerto Rico’s constitutional debt limit and are invalid.
As it turns out, Aurelius and Autonomy Capital are the major hedge fund owners of those GO bonds.
The price of the GOs issued in 2014 — the biggest post-2012 issue — has stayed virtually flat this year, starting out at 54 cents on the dollar and recently trading around 54.80 cents. But the earlier vintage GOs — those issued before 2012 — have jumped from 54 cents on January 1 to 63.10 cents. Earlier-vintage Public Buildings Authority (PBA) debt, which has a GO guarantee, has soared in value. Those bonds began the year at 52.80 cents on the dollar and hit 73.30 cents in mid-April.
Investment firms holding pre-2012 bonds include GoldenTree Asset Management, Whitebox Advisors, Taconic Capital Advisors, and Monarch Alternative Capital. Together, they call themselves “the lawful constitutional debt coalition,” and started buying the bonds in late 2018. This year, following the board’s lawsuit, they’ve added to their holdings.
GoldenTree owns the biggest portion, with some $382 million in the uninsured debt plus $1.2 million that’s insured, according to a March bankruptcy court filing. The hedge fund upped its position since late last year, when it owned $227 million in uninsured debt.
Whitebox has $162.9 million in uninsureds, up from $141.9 million. Taconic’s uninsured holdings amount to $122.3 million, up from $84.6 million, in addition to a $15.2 million insured stake, up from $12.7 million, the filing said.
Monarch owns $321.8 million in insureds, and $35.7 million in uninsureds, according to filings. Last year Monarch was part of the Aurelius group, but sold its more recently issued GO bonds and now owns earlier-vintage debt.
The two groups have a long contentious history.
[II Deep Dive: How Hedge Funds Hurt Puerto Rico]
GoldenTree, Whitebox, and Taconic also own Cofinas, bonds backed by a slice of the island’s sales taxes.
In 2016, Aurelius and other GO bondholders sued the Cofina bondholders, saying the debt was structured to avoid Puerto Rico’s constitutional limits on borrowing and siphoned off revenues that should be available to pay the Commonwealth’s GO bondholders.
Then in 2017, Cofina bondholders shot back, arguing in court that some of the GO debt was invalid because it exceeded constitutional debt limits — the same argument the oversight board made earlier this year. The Promesa board, as it’s known, was created by the Puerto Rico Oversight, Management, and Economic Stability Act.
Last summer, the GO bondholders dropped their case against the Cofinas, which allowed the latter group to cut a deal with the government of Puerto Rico and the Promesa board that was recently approved by the court, with some Cofinas getting as much as 93 cents on the dollar.
Now the lawyer for the Cofina group, Susheel Kirpalani of Quinn Emanuel Urquhart & Sullivan, is back in court going after the GO bondholders again.
“We look forward to demonstrating that Puerto Rico’s Constitution requires that payments made by the central government for debt service on PBA bonds guaranteed by the Commonwealth be counted toward the debt limit. Had the Constitution been faithfully applied, GO bonds and guarantees issued after March of 2012 could not have been backed by the Commonwealth’s full faith and credit,” Kirpalani said in a statement.
Meanwhile, in another setback for Aurelius, the Promesa board said in a statement Tuesday it would petition the U.S. Supreme Court to review a February 15 decision by the U.S. Court of Appeals for the First Circuit that is related to the Puerto Rican bankruptcy.
In that decision, the appeals court overturned a lower court ruling, and declared that Promesa’s board member appointments were unconstitutional. That was a victory for Aurelius, which had argued the same thing.
Aurelius did not return a request for comment and Autonomy declined the invitation.
