Legal Highlights In Puerto Rico’s 'Draft POS' For Upcoming General Obligation Bond Issue

Author:Mr Leonard Weiser-Varon and William Kannel
Profession:Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
 
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Although Puerto Rico's much-discussed sub-investment grade general obligation bond issue is not yet being marketed via an official preliminary official statement, it appears that a draft POS has been making the rounds.  The draft POS, dated February 28, 2014, has been posted on at least one website and has been referenced in Bloomberg news reports.

From a legal perspective, an initial review of the draft POS includes the following items of interest:

The bonds as offered will not be subject to acceleration upon default.  Accelerability is one of the items that had been mentioned on the buy-side wish list, as otherwise a payment default on a particular coupon or maturity would only entitle bondholders to institute remedial action for the payment of that particular coupon or maturity. Unsurprisingly, there is a lengthy "Risk Factors" section, atypical for general obligation bonds but not for sub-investment grade bonds. The draft POS indicates that Puerto Rico's Secretary of the Treasury has exercised his new statutory authority to provide for application of New York law and to expressly agree to the jurisdiction of New York's state and federal courts (as well as Puerto Rico's) in any action relating to this issue of general obligation bonds. As we have previously discussed, this item was higb up on the buy-side wish list.  However, the draft POS indicates that "no assurance can be given that any such litigation will be accepted by or, once accepted, be continued in a New York court or federal court in New York if the particular court determines by law that it does not have jurisdiction over the Commonwealth or that it should be removed to a court in Puerto Rico, as being more suitable on grounds of judicial fairness to the parties involved." Furthermore, the draft POS states that "[a]lthough a judgment from a New York court should be given effect in Puerto Rico pursuant to the full faith and credit clause of the U.S. Constitution, such a judgment must meet certain minimum requirements before a Puerto Rico court will give it effect" and that "[t]here is no assurance that any judgment from a New York court would be given effect by a Puerto Rico court." The draft POS acknowledges the priority status of debt service payments on Puerto Rico's "public debt" under Puerto Rico's constitution, but indicates that "public policy considerations relating to the safety and...

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