2. PURPOSE OF THE SITE: NO OFFER OF SECURITIES; NO ADVICE
The Site is intended to provide an overview of Emso and its products, and is for general information purposes only. The Site is not intended to provide investment, accounting, tax or legal advice. You should consult your own investment, legal and/or tax professionals regarding your specific situation. Users of this Site should be aware that Emso is not acting for, or advising them, and is not responsible for providing them with the protections available under the UK regulatory system. Compensation will not be available from the UK’s Financial Services Compensation Scheme.
Emso makes no representations that materials at this Site are appropriate for use in all locations, or that transactions, securities products, instruments or services discussed at this Site are available or appropriate for sale or use in all jurisdictions, or by all investors or counterparties. Those who access this Site do so at their own initiative, and are responsible for compliance with applicable local laws or regulations.
UNDER NO CIRCUMSTANCES SHOULD ANY MATERIAL AT THIS SITE BE USED OR CONSIDERED AS AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY SECURITIES, ANY OTHER INSTRUMENTS OR INTERESTS OF ANY FUND (DESCRIBED BELOW), WHETHER OR NOT SPONSORED OR MANAGED BY EMSO. IN PARTICULAR, THIS SITE IS NOT INTENDED AS MARKETING OF ANY FUND IN ANY MEMBER STATE OF THE EUROPEAN ECONOMIC AREA FOR THE PURPOSES OF THE EU DIRECTIVE 2011/61/EU ON ALTERNATIVE INVESTMENT FUND MANAGERS.
ANY SUCH OFFER OR SOLICITATION CAN AND WILL BE MADE ONLY BY MEANS OF THE PROSPECTUS OR EXPLANATORY MEMORANDUM OF EACH SUCH INVESTMENT FUND OR OTHER APPLICABLE DOCUMENT, ONLY IN JURISDICTIONS IN WHICH SUCH AN OFFER WOULD BE LAWFUL AND ONLY TO INDIVIDUALS WHO MEET THE INVESTOR SUITABILITY AND SOPHISTICATION REQUIREMENTS THAT ARE DETERMINED FROM TIME TO TIME BY EMSO IN ITS SOLE AND ABSOLUTE DISCRETION.
In the United Kingdom, this Site is directed only at persons who are: (i) investment professionals within the meaning of Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 ("FP Order") or Article 14 of the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 ("CIS Order"); (ii) high net worth companies and certain other entities falling within Article 49 of the FP Order or Article 22 of the CIS Order; or (iii) any other persons to whom such communication may be made in accordance with the relevant provisions of the Financial Conduct Authority's Conduct of Business Sourcebook. It must not be used by, or relied upon, any other persons.
The Content is not intended for the account of U.S. persons (as defined in Regulation S under the United States Securities Act of 1933, as amended (the "Securities Act")) other than persons who are "qualified purchasers" (as defined in the United States Investment Company Act of 1940, as amended) and/or "accredited investors" (as defined in Rule 501(a) under the Securities Act).
3. NATURE OF THE CONTENT
While Emso uses reasonable efforts to obtain information from reliable sources, Emso makes no representations or warranties as to the accuracy, reliability, or completeness of any Content at this Site. Opinions and any other Content are subject to change without notice. Emso is not utilizing this Site to provide investment or other advice to you or any other party, and no information or material at this Site is to be relied upon for the purpose of making or communicating investment or other decisions.
All materials on this Site are meant to be reviewed in their entirety, including any footnotes, legal disclaimers, restrictions, or disclosures, and any copyright or proprietary notices. Any disclaimers, restrictions, disclosure, or hedge clauses apply to any partial document or material in the same manner as they do the whole, and will be deemed incorporated in the portion of any material or document that you consult or download.
4. SUMMARY OF RISK FACTORS
Investments in hedge funds and other investment funds, including those managed by Emso and such funds' investments in any other funds (collectively, the "Funds" or “Advisory Clients”), are speculative and involve a high degree of risk and are intended only for experienced and sophisticated investors. Investment in a Fund may expose an investor to a significant risk of losing all of the property or other assets invested. There are unique risks involved when investing in a particular Advisory Client. You should carefully review each Advisory Client’s offering materials and related information for specific risk and other information before investing. This Site does not list, and does not purport to list, the risk factors associated with an investment in any of the Advisory Clients.
5. USER IDENTIFICATION CODES AND PASSWORDS
Portions of the Site are password-protected and are accessible only to users who have been issued passwords by an authorized representative of Emso and who meet the applicable investor suitability, experience and sophistication requirements. Password-protected portions of the Site may contain performance information for the Advisory Clients sponsored or managed by Emso. Users of the password-protected portion of the Site acknowledge that past performance is not necessarily indicative of future results. Do not enter the password-protected portion of the Site through use of your User I.D. and password unless the terms and conditions of this Agreement are acceptable to you. You may not obtain or attempt to obtain unauthorized access to such parts of our Site, or to any other protected materials or information, through any means not intentionally made available by Emso for your specific use. If you are issued a password, you agree that you will treat and maintain this information confidentially and will not permit others to sign onto the Site through the use of the User I.D. and Password assigned to you. You accept full responsibility for any use of your Password, and will notify us immediately of any actual or suspected unauthorized use of your Password. The User I.D. and Password are personal for your use only, and any violation of the terms of this Agreement shall permit Emso to immediately suspend or terminate your further access to the Site.
6. CONFIDENTIALITY, INTELLECTUAL PROPERTY RIGHTS
Emso owns and maintains this Site. The Content is the intellectual property of Emso. Nothing at this Site shall be construed as granting by implication, estoppel, or otherwise any license or right to use any of the Content of the Site. No act of downloading or otherwise copying from this Site will transfer title to any software or material at this Site to you. Anything that you transmit to this Site becomes the property of Emso, may be used by Emso for any lawful purpose, and is further subject to disclosure as deemed appropriate by Emso including to any legal or regulatory authority to which Emso is subject. Emso reserves all rights with respect to copyrights, service mark, and trademark ownership of all Content, names, logos or identifying marks relating to products or services of Emso at this Site and will enforce such rights to the full extent of the law.
Unless information contained on the Site is otherwise public information, all Content contained on the Site is considered to be confidential information (including the Site's features, functions, options, tools, capabilities, format, and layout, etc.), and you agree not to copy, republish, or redistribute any of the Content or disclose the same to any third parties unless and only to the extent Emso has given you written permission to do so.
We may collect personal information about you through: (i) your completion of registration or subscription forms or as otherwise provided by you through this Site; and (ii) information you provide relating to your transactions with Emso or its Advisory Clients. We may also collect information about your visits to this Site through use of Internet “cookies” (an information collecting device from a web server) as described further below. By browsing this Site, you agree to Emso's use of such cookies.
We may use such personal information for the purposes of administering the relationship between us, marketing of products and services, monitoring and analysing our activities, and complying with any legal or regulatory requirements. We may transfer the personal data we hold about you or individuals associated with you to any country, including countries outside the European Economic Area, for any of the purposes described above. We may also transfer your personal information to a third party to whom we transfer any of our rights or obligations under any agreement, or who acquires an interest in any of Emso’s assets, or in connection with a sale of its shares or the merger or consolidation or other transfer of the assets of Emso, whether voluntarily or by operation of law, to such third party, or who is otherwise deemed to be a successor or transferee. We may disclose any personal information if we are required to, requested, or permitted to do so, by a court of law, by any governmental, regulatory or law enforcement agency, including the police, or in connection with legal proceedings or where required by our website internet service provider. We may also disclose any personal information if we determine it is necessary or desirable to comply with any law or to protect or defend our rights or property.
Although we will do our best to protect your personal information, we cannot guarantee the security of your data transmitted through this Site. Any transmission of data is at your own risk.
We may send text files (e.g., “cookies” or other cached files) or images to your web browser to store information on your computer. Such text files and images are used for technical convenience to store information on your computer. For instance, we may use a session cookie to store form information that you have entered so that you do not have to enter such information again. We may use information stored in such text files and images to customize your experience on this Site and to monitor use of this Site. You may set your browser to notify you when you receive a cookie. Many web browsers allow you to block cookies. If you do block cookies you may not be able to access certain parts of this Site. You can disable cookies from your computer system by following the instructions on your browser or at www.allaboutcookies.org.
You may have certain rights under applicable data protection laws which may include the right for you to receive a copy of the personal information we hold about you. For a copy of your personal information please write to us at the address provided below. We may charge you a nominal fee for complying with such a request in accordance with applicable law. In addition, you may have a right to request personal data provided on this Site is corrected, blocked or deleted if the data is factually incorrect, incomplete or irrelevant for the purposes described in these terms and conditions.
If you have any questions about the use of personal information, please contact email@example.com.
The Site is operated by Emso on an "AS IS," "AS AVAILABLE" basis, without representations or warranties of any kind. EMSO DISCLAIMS ANY AND ALL REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THIS SITE AND ITS CONTENT, WHETHER EXPRESS, IMPLIED, OR STATUTORY, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF TITLE, MERCHANTABILITY, NON-INFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE. Without limiting the foregoing, Emso does not represent or warrant that the Content on the Site is accurate, reliable, complete, or current, or that the Site will operate without interruption or error. Emso makes reasonable efforts to avoid technological problems, but at any time the Site may have and may cause problems, such as viruses or other harmful components. Emso shall not be liable for any action you take or any decision you make in reliance on the Site. Some jurisdictions do not allow the disclaimer of implied warranties, so the foregoing disclaimer may not apply to you.
You acknowledge that you are aware that by using this Site you may be subject to security and privacy exploitations, including, eavesdropping, sniffing, spoofing, hacking, breaking passwords, harassment, exposure to objectionable material, posturing, and/or other security or privacy hazards.
9. LIMITATION OF LIABILITY
Under no circumstances, shall Emso and its affiliates or any of their employees, directors, officers, agents, vendors or suppliers be liable for any direct or indirect losses or damages arising out of or in connection with the use of or inability to use the Site. This is a comprehensive limitation of liability that applies to all losses and damages of any kind (whether general, special, consequential, incidental, exemplary, or otherwise, including, without limitation, loss of data, income or profits), whether by statute, law or in contract, negligence, or other tortuous action, even if an authorized representative of Emso or its affiliates has been advised or should have known of the possibility of such damages. Applicable law may not allow the limitation of liability set forth above, so this limitation of liability may not apply to you. In no event shall the total liability of Emso or any of its affiliates for any and all damages and causes of action exceed the amount paid by you, if any, for the use of this Site.
10. NO ENDORSEMENTS
References on the Site to any names, marks, products or services of third parties or hypertext links to third party sites or information do not constitute or imply an endorsement, sponsorship, or recommendation of the third party, information, product or service by Emso. Emso and its affiliates do not endorse or make any warranties or representations about any site you may access through the Site. Any links to other sites are provided for convenience only. If you access any third party web site through the Site or otherwise, you do so at your own risk.
11. MONITORING THE SITE
Emso reserves the right to monitor and record activity on the Site at its sole discretion, and may report any activity that it suspects may violate any law or regulation as it deems appropriate.
This Agreement (including non-contractual disputes or claims) shall be governed by and construed in accordance with the laws of England and Wales.
Specious legal arguments argue for zero recovery on allegedly invalid bonds versus serving the Commonwealth and its people.
We believe that the strategy adopted by the Financial Oversight and Management Board (the Board) for Puerto Rico and the Unsecured Creditors Committee (UCC) in seeking invalidation of certain bonds is fundamentally flawed and works against the interests of the Commonwealth and its people. Instead of the intense litigation that was initiated, we believe that a swift resolution through mediation would have benefited all stakeholders. We examine below the flaws of the invalidation litigation and the Board’s broader strategy.
In January 2019, the UCC and the Board put forth the argument that certain General Obligations (GO) bonds issued by the Commonwealth of Puerto Rico are invalid on a number of theories, the most salient of which is that the issuances in 2012 and thereafter breached the Puerto Rico constitutional debt limit. The UCC and a number of bondholders later argued that, on the same basis, some of the prior GO issuances and bonds issued by the Public Buildings Authority (PBA), and guaranteed, by the Commonwealth could be invalid as well.
We believe that the invalidation argument suffers from key fallacies. First, the documentation (including related legal opinions) and the issuer’s long-standing practice of calculating the debt limit confirmed that these issuances were within the constitutional debt limit. Second, the Debt Investigation Report, prepared by Kobre & Kim LLP, which comprehensively audited the debt issuances, did not conclude that the debt limit had been breached by GO or PBA issuances. Third, we believe that the arguments presented by the Board and, in particular, the UCC, are overreaching, as is the variation offered by the Quinn Emanuel Urquhart & Sullivan group of GO bondholders. None of the arguments, in our opinion, relies on precedent on point.
When coupled with its ultra-conservative assumption in the fiscal plan, we think that the Board has reduced the chances of a negotiated outcome and is instead pushing for a purely litigated outcome. The practical consequence of this being a poisoned consensual well and the profound resentment of the Commonwealth and its creditors. We believe that the legal consequence will be an intensification of litigation (between creditors and the Board joined by opportunists and among creditors) and hence a quest for higher recoveries. The crowd of bondholder groups and legal advisors involved, which is a direct result of the Board’s (successful) divide and (not so successful) conquer strategy, will generate additional litigation, which we think the Board has misread as generating upside only.
The intricacies of Commonwealth public debt are much more significant than COFINA 1, a GDB 2, or a PREPA 3, namely because it covers a wide variety of claims and stakeholders which makes the litigation that is being filed risky in terms of (1) opening a pandora’s box with no predictable outcome, (2) an inability to walk back some of the legal actions that have been initiated, and (3) risk of entrenchment of various creditors in litigation which is harder to reverse over time.
Impairment of creditor rights and future market access
The Commonwealth’s GO is its flagship bond and a standard type of bond in municipalities. Going forward, we believe that the market will no longer trust a plain vanilla GO bond, which will result in either higher yields or secured revenue bond structures that are more complex, constrain the flexibility of the Commonwealth in the management of its resources, and might not be as favorably absorbed by the municipal bond market. Not only does the litigation create unpredictability and compromise future issuances, current bond prices indicate that the bigger picture of seniority of GO bonds within Commonwealth public debt has been lost.
The real impact of invalidation
A successful invalidation would have (1) limited impact as, at most, the outstanding amount of challenged bonds would be reduced to bring it within the debt limit (contrary to the Board and UCC’s assertion that it should be invalidated in full), and (2) no benefit for the Commonwealth because the Board’s theory is to offer a pre-set amount to GO bondholders: it increases the recovery of certain bondholders to entice their consent to a plan of adjustment structured at the expense of other GO bondholders – a zero sum game for the Commonwealth and its people.
GO bondholders would have more leverage on the Commonwealth in the absence of the PROMESA Title III process 4 (i.e., similar to a U.S. Bankruptcy Code Chapter 9) and, as a corollary, the Commonwealth and its people would be vulnerable to the discomforts of attachments of assets (including its large cash balances) and the continued burden of contractual debt service, without any clear path to obtain concessions from creditors. Why should GO bondholders worry if the Title III process is dismissed by the Courts as a result of a prolonged impasse? Those who should worry most are not GO bondholders but pensioners and holders of structurally creative or bespoke claims that cannot rely on clear constitutional priorities.
Contrary to any other restructuring we have seen, there appears to be no solvency or liquidity problem considering Puerto Rico’s increasing economic performance, cash balance, and possible improvement in governance thanks to the Board’s vigilance. As a result, we believe the need for haircuts or other concessions from creditors will wane with the passage of time.
Increased costs and expenses
The litigation that has already resulted from the invalidation action, and the ancillary litigation that will be needed to correct its wrongs, is a considerable waste of judicial resources and taxpayer money.
As in COFINA (where the circumvention of the Puerto Rico Constitutional debt limit through a securitization of sale and use tax revenues was questioned), the most likely outcome is a settlement of the invalidation action at a recovery level for bondholders that indicates that this action was meritless. The Board’s actions will likely make it more expensive to get to a settlement with creditors because bondholders look to the higher of the trading price, and the price that creditors assess based on their legal rights. In other words, it is not so much the fall in price of the challenged GO bonds that matters; it is the increase in price of unchallenged GO bonds and PBA bonds that has raised the threshold for recoveries to be offered in a confirmable plan of adjustment.
It may be that this is needed for local or Federal political consumption, but it does not pass a cost-benefit test. The quest for higher recoveries by creditors and the additional and avoidable costs and expenses – included or not in the professional fees of the Board, the AAFAF 5, and the UCC, to the tune of USD 1.1 billion over five years – will ultimately be borne by the Puerto Rican people.
The better agenda
The Board will likely attempt to craft a plan of adjustment that takes advantage of the differences in price of GO bonds. We think that this attempt and the invalidation litigation will ultimately fail, and all GO holders will be entitled to the same plan consideration. Instead, the Board should revert to a consensual restructuring through mediation and move the debate to the proper place, i.e., the structure of recovery package (for example, a growth instrument as a component thereof) that makes the most effective use of the sizeable cash balances and incentivizes the Commonwealth to deliver on reforms for its people while offering an acceptable recovery to creditors to ensure a fast-track debt restructuring and regain market access at competitive yields. We believe that the recent economic recovery and cash balance levels would make that a considerably easier conversation to be had.
Finally, we believe that the Board is right when it claims that it now has a unique opportunity to fix Puerto Rico. Under PROMESA, the Board has not been designed to be a permanent institution, but it is instead mandated to do a rapid and deep fix of Puerto Rico’s fiscal and structural situation. That said, a significant level of uncertainty looms ahead for Puerto Rico, including a Presidential election, a PR gubernatorial election, a Congressional committee looking to possibly revise PROMESA; improving economic performance of PR reducing urgency for fiscal and structural measures, so why risk the current stable backdrop?
1 Puerto Rico’s Sales Tax Financing Corporation, a government-owned corporation.↩
2 The Government and Development Bank for Puerto Rico has been liquidated and was the first instrumentality whose debt was restructured under the 2016 Puerto Rico Oversight, Management and Economic Stability Act (PROMESA)↩
3 Puerto Rico Electric Power Authority, the Puerto Rico power utility company.↩
4 Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), a US federal law establishing, among other features, an oversight board and process for restructuring debt to combat the Puerto Rican government debt crisis.↩
5 Puerto Rico Fiscal Agency and Financial Advisory Authority, a group of government-owned corporations that manage all aspects of financing for the executive branch of the government of Puerto Rico.↩