Aurelius Capital Management and Autonomy Capital will be forced to take steep haircuts on their Puerto Rico general obligation bonds under a new restructuring agreement reached between creditors of other Puerto Rico debt and the board overseeing the restructuring.
The oversight board created by the Puerto Rico Oversight, Management and Economic Stability Act earlier this year alleged that the GO bonds issued in 2012 and 2014 — the type owned by Aurelius and Autonomy — were unconstitutional. However, the agreement gives $2.7 billion in 2012 GOs 45 cents on the dollar and $3.6 billion in 2014 GOs 35 cents on the dollar.
That’s less than the markets have anticipated. Earlier this year, the 2014 bonds traded around 50 cents on the dollar.
Aurelius and Autonomy won’t be able to act as holdouts and stop the plan from going forward, either.
“If holders of invalid 2012 and 2014 GO bonds do not want to accept the deal, they can opt to litigate against a litigation trust that will be established,” according to a statement by the creditors’ group of hedge funds that struck the deal, citing details in the plan documents.
But if these creditors don’t agree to the new deal and instead decide to litigate, they aren’t guaranteed to get anything, according to the plan.
Moreover, “holdout bondholders will not be able to prevent a Plan of Adjustment from being confirmed,” the creditors’ statement said.
Autonomy declined to comment, and Aurelius did not respond to a request for comment.
The group of hedge funds who call themselves the Lawful Constitutional Debt Coalition — who own older vintage GOs and Public Buildings Authority debt — negotiated with the board for three months to reach the agreement. They ended up faring much better than Aurelius and Autonomy.
Some $6.9 billion in older GOs, owned by Golden Tree Asset Management, Whitebox Advisors, Taconic Capital, and Monarch Asset Management will get 64 cents on the dollar.
And $3.9 billion in vintage PBAs, which these hedge funds also own, will get 73 cents on the dollar.
Others in the group that signed onto the deal include Farmstead Capital Management, Aristeia Capital, and FCO Advisors.
The pre-2012 school and construction bond holders that have a GO-guarantee backing their bonds, including Canyon Capital Advisors, Och-Ziff Capital Management, and Davidson Kempner Capital Management, also signed onto the deal.
All of these creditors could end up with as much as 89 cents on the dollar depending on the outcome of any litigation with the newer GO bondholders, who’ve not settled with the board.
The agreement allows Puerto Rico to reduce its aggregate unsecured debt and liabilities from $35 billion down to $12 billion, according to the Promesa board.
In a statement for the creditors’ group, Susheel Kirpalani of Quinn Emanuel Urquhart & Sullivan, the attorney that represented the creditors’ group, said, “It is a very positive development for Puerto Rico that a cross-section of large bondholders has worked with the Oversight Board to develop a consensual restructuring agreement that will accelerate the Commonwealth’s exit from bankruptcy, respect the lawful priority of valid public debt, and help ultimately restore capital markets access.”
Participating bondholders will receive a combination of new bonds and cash.
