“Good news! I came home from work to find the papers for SV Credit in the mail. And I think they help illuminate our mystery,” wrote Ethan Corey immediately in an email when he got home after work in New York. SV Credit is the name that appears in the government of Puerto Rico’s bankruptcy case documents to identify the firm with the second highest amount of debt within the ERS Creditors Group. This eight-investment firm alliance claims $2 billion in bonds from the government’s Employees Retirement System (ERS).
Corey is a journalist for In These Times, which together with the Center for Investigative Journalism (CPI for its initials in Spanish) have worked to uncover the identity and learn about the track record of the main bondholders in the bankruptcy case being discussed in federal court under the Puerto Rico Oversight, Management and Economic Stability Act of 2016, known as the PROMESA law.
What the documents he found in his mailbox say, which he obtained after calls and procedures at the State of Delaware’s corporations division, is that SV Credit’s owner is the CSCP III Cayman General Partner investment fund, managed by Centerbridge, a vulture fund with $30 billion in assets under management and co-managed by Mark Gallogly, who was part of former President Barack Obama’s Economic Recovery Advisory Board.
The incorporation certificate that finally clears the mystery about who was behind SV Credit is signed by Susanne V. Clark, senior general manager at Centerbridge.
Like many hedge funds, this firm also administers teacher pension plans. Among its clients are the California State Teachers Association, which invested $250,000 in Centerbridge’s high-risk division, and the Oregon State Investment Fund, which put $500 million in the same division. Centerbridge also manages pension plans for the states of Pennsylvania, California and Massachusetts. On the other hand, through the Centerbridge Foundation, it funds nonprofit organizations that manage charter schools, such as New Visions for Public Schools and Uncommon Schools, both in New York.
In turn, Centerbridge has a stake in Ambac Financial, an insurer of $1,996 billion in bonds from several Puerto Rico government entities, and which is part of the bankruptcy case. As of October, Centerbridge’s participation in Ambac was $28 million. It is also part of a group of vulture funds that own 70% of PRISA, the company that owns the Spanish newspaper El País. That PRISA investment group, which includes other firms with Puerto Rico bonds such as Angelo Gordon, Och Ziff Capital and Monarch Alternative, rejected a 50 million euro discount on that company’s debt, which is in a restructuring process. Centerbridge is also in the middle of negotiations to finance the “largest wind farm in Greece.”
Centerbridge co-founder, Mark Gallogly, sits on the advisory board for the Hamilton Project, an economic policy think tank of The Brookings Institution, as well as on the Columbia Business School’s Board of Overseers and the ROADS Charter High Schools Board of Directors. Since founding Centerbridge in 2005, he has made political contributions that add up to $ 2,180,135.36, mostly to Democratic candidates and committees.
Jeffrey Aronson, with whom Gallogly founded Centerbridge, began his career as an attorney at the Stroock & Stroock & Lavan law firm, he worked at the L.F. Rothschild & Co. law firm, and before co-founding Centerbridge, in 2007, he was a partner at the Angelo, Gordon & Co. vulture fund, which is currently a member of the Puerto Rico Electric Power Authority’s (PREPA) Ad Hoc Group of Bondholders. Aronson chairs the Johns Hopkins University Board of Directors and is a member of the Johns Hopkins Medicine and the New York University School of Law boards. Since 2005, he has made political contributions for the sum of $ 377,400.00, mostly to Democratic candidates and committees.
Centerbridge requested $300 million from the government of Puerto Rico’s General Obligation bond issue in 2014, of which it obtained $70 million.
He also belonged to the Ad Hoc Group of General Obligation bonds, but since he started the bankruptcy process he had not made an appearance; until now, when In These Times and the CPI revealed that he runs the SV Credit fund, through which he claims $389,851,034 in Retirement Systems bonds.
The CPI identified that another one of the eight firms that make up the ERS Creditors, and which until now had been a big unknown, Andalusian Global Designated Activity, belongs to the Appaloosa Management vulture fund. Appaloosa held PREPA bonds and requested $300 million from the 2014 General Obligation bonds issuance, from which they obtained $50 million.
Andalusian Global Designated Activity was registered in Ireland in 2011 as a “brokerage and fund management firm.” The address of the Andalusian headquarters is 51 John F. Kennedy Parkway, New Jersey, the same as Appaloosa.
Listed as directors of Andalusian are James E. Bloin, vice president of Appaloosa since 2007, Roddy Stafford, who was director of Besaya ECA Limited, a subsidiary of Banco Santander, S.A. incorporated in 2011 in Dublin, Ireland, and XELO Public Limited Company, a subsidiary of Barclays PLC. In 2016, Stafford was director of at least 24 companies registered in Ireland between 2009 to 2015, and of Cardinal Health, registered in England in 2009 as a subsidiary of the multinational by the same name. Cardinal Health is a Fortune 500 health services company, with presence in Puerto Rico. The third director of Andalusian Global is Thomas Geary, who is also the director of 55 other companies.
In the bankruptcy case document where the ERS Creditors firms reveal the amounts of debt they claim, Andalusian appears with the address of law firm Matheson, in Dublin, Ireland, who have as clients “the majority of Fortune 100 companies and more of half of the 50 largest banks in the world” that do business or register in that country. Through the Andalusian Global company, Appaloosa claims $196 million in Retirement bonds.
Appaloosa was founded in New Jersey in 2003 by David Tepper and Jack Walton, and has its interest in charter schools in common with Centerbridge. Tepper founded the Better Education for Kids organization in 2011, a group that advocates for charter schools. In 2014, The New York Times named Appaloosa as one of the 10 largest hedge funds that have interests in that teaching system where a private company runs a public school.
Tepper is a member of the Federal Reserve Bank of New York’s advisory committee, whose task is to inform the president of the institution. The NY FED, as they call it, oversees District 2 of the Federal Reserve System, which includes Puerto Rico, and has produced several reports on the economic crisis on the island. Tepper is also a member of the Carnegie Mellon University trust and founder of the David Tepper Charitable Foundation.
In September, Tepper donated $3 million to the Feeding America organization for the recovery of Texas, Florida and Puerto Rico following the passage of hurricanes Irma and María.
Appaloosa has $17 billion in assets under management. Among its main investments is Chinese online trading conglomerate Alibaba Group,where Appaloosa had shares worth $520 million in August 2017. During the same month, it had $355 million in Facebook shares.
Tepper’s political contributions totaled $1,996,000 in 2016. His donations include $500,000 and $250,000 to the New Day for America political action committee for the candidacy of John Kasich, Republican Governor of Ohio; $250,000 to Right to Rise USA, created to support the presidential candidacy of Republican Jeb Bush; $10,200 to Boehner for Speaker. John Boehner, a Republican, was Speaker of the U.S. House of Representatives until 2015.
In 2011, Tepper helped Matthew Knauer, a former Appaloosa analyst, and Mina Faltas, a Viking Global analyst, both 33 years old, to found their own hedge fund. They called it Nokota Management. Nokota requested $50 million from the 2014 General Obligation bond issue and obtained $5 million. Now they claim $53,675,000 in retirement bonds.
Ocher Rose is the third firm with the largest amount of bonds in the ERS Creditors, but it is still a ghost company, as SV Credit and Andalusian Global have been until now. It claims $197,480,174 and was registered in the state of Delaware in 2015 as a limited liability corporation. The only information about this company in the Title III documents is the address of its incorporating agent, Corporation Trust Center, located in Delaware.
The CPI requested a reaction from Centerbridge and Appaloosa, but neither of the firms responded to the requests for reconfirmation and interview.
The ERS Creditors’ largest firm is experienced in Puerto Rico
The firm with the largest amount of debt in the ERS Creditors is Oaktree Capital, a vulture fund that claims $400 million through seven separate funds. The other firms in the group, in addition to Centerbridge/SV Credit and Appaloosa/Andalusian Global, are Altair Global, Glendon Opportunities, Mason Capital, Nokota Capital and Ocher Rose.
Oaktree Capital knows Puerto Rico’s investments arena well. Since 2013, they owned 50% of the operator of the Luis Muñoz Marín International Airport in San Juan, Aerostar Airport Holdings; which acquired the airport in 2013 when it was privatized. In May 2017, Oaktree sold its stake in Aerostar for $430 million. In addition, it purchased $25 million in the government of Puerto Rico’s General Obligation junk bond emission of 2014.
Oaktree Capital handles $100 billion through various funds with interests in the infrastructure, energy and real estate industries. Oaktree Capital Management, part of Oaktree Group, has 900 employees, its headquarters are in Los Angeles and it has offices in 17 cities, including London, Dubai, Hong Kong, Tokyo and Sydney. Among Oaktree’s customers there are more than 400 corporations, more than 350 foundations and 50 U.S. government retirement plans.
Mason Capital Master Fund, registered in the Cayman Islands, belongs to Mason Capital Management, a hedge fund founded in 2000 by Kenneth Mario Garschina and Michael Emil Martino. It has interests in Reynolds American, Marathon Petroleum Corporation, HRG Group, an oil exploration company created by George H. W. Bush and the Rite Aid pharmacy. Mason Capital has $3 billion in assets under management and claims $141,056,428 in retirement bonds.
Glendon Capital Management, which claims $33,764,239 in Retirement bonds through its Glendon Opportunities Fund, LP fund, is a vulture fund created in 2013 under the auspices of Barclays bank by Matthew Barrett, former head of Barclays’ risky debt division, and the bank’s former CEOs, Holly Kim and Brian Berman. Before joining Barclays, the three executives worked for Oaktree Capital, another member of the ERS Creditors Group. Glendon started with $2.8 billion in assets under management that included Barclays capital.
Among Glendon’s clients is the Los Angeles City Employees Retirement System, whose financial adviser recommended in 2014 investing more than $20 million in the Glendon Opportunities Fund, while the New Jersey Treasury Department’s investment division proposed investing more than $100 million in Glendon Opportunities Fund II in 2017. Glendon Capital’s main investments are in CF Industries Holding, manufacturers and distributors of nitrogen and fertilizer for the agricultural industry. It also has investments in American Realty Capital, Ally Financial and in the C&J Energy oil company. Based in California, Glendon Capital Management requested $15 million from the 2014 General Obligation bond issue and obtained $2.5 million.
Altair Global Credit Opportunities Fund (A) is a division of First Republic Investment Management managed by Hezy Shalev, a corporate lawyer for this fund specializing in private investments and is registered as a hedge fund with the SEC. It is incorporated in Delaware and has another fund by the same name, identified as (D), incorporated in the the Cayman Islands’ tax haven. It claims $12,735,516 in Retirement bonds.
Meanwhile, the ERS Creditors includes representation for Jones Day, described by Bloomberg as “Trump’s favorite legal firm” since at least 14 of the firm’s lawyers were recruited for the United States president’s team. In the Title III proceedings, the Official Committee of Retired Employees includes Robert Gordon, of the Jenner & Block firm, who was an advisor to the Detroit retirement systems during its restructuring. In that city, the pensions of 12,000 public employees were reduced by 6.7%. They also hired Héctor Mayol-Kauffmann, of the Benazar García & Millán firm, who headed the Puerto Rico Retirement System of from 2009 to 2013.
A retirement system in ruins
The 15-story building that was the headquarters of the Retirement Systems Administration (ASR) in Hato Rey is closed due to the damage caused by Hurricane María. From the Ponce de León avenue and the streets that surround it, you can see there are broken windows and the interior of some offices that were gutted as if a bomb had exploded there. According the Retirement System’s press officer, Carlos Ramos, a report is being prepared to determine if the structure was “total loss.”
“We got there (to the building) on May 28, 1978. I began on August 27, 1973, when it was on Fortaleza Street, and from there we moved to Santurce, and from there we came here, which is dead now, because they say that that is …,” said Nora Betancourt, who saw the building in photographs, but did not want to go see it in person, despite the fact that she works one street over, at the Government Pensioners Association. She is a Retirement System pensioner, where she worked for 32 years, until 2005.
Sitting at one of the cubicles where she helps pensioners at the Association’s headquarters, with the noise of a generator that energizes the back office, she reviewed the benefits that she has as a pensioner, and that those who start working with the government will not have from now on: “contribution to the medical plan, summer bonus and $200 Christmas bonus, which reached $600, and $1,000 for death and funeral expenses. In the future that is being eliminated.”
The Retirees Association, which offers legal services, has a pharmacy and serves 52,000 members, is operating only until noon due to a lack of energy. In the middle of the interview with Bentancourt, the power generator shut down, the office became semi-dark, and temperature immediately went up. Outside, after the employees had left the office, older people were still arriving and left when they saw the place closed.
The ASR includes the pension plans of central government employees (agencies and corporations), of teachers and of the judiciary. The Police, Puerto Rico Electric Power Authority and the University of Puerto Rico have separate pension plans.
The bonds claimed by the ERS Creditors firms were issued in 2008 specifically on behalf of the Central Government Retirement System. The issue was divided into three series totaling $3 billion with future employer contributions as collateral for bondholder payments.
The administrator of the ASR at that time, Juan Cancel-Alegría, said in a 2008 statement that the bond issue was made to “strengthen the System’s financial, economic and fiscal capacity; as well as addressing the actuarial deficit, extending the life of this benefit to meet the commitment with government employees who contribute to this pension plan.”
Eight years after the emission, the ASR faced a $48 billion deficit, according to the government’s latest financial report published in 2016. It is now in bankruptcy under Title III of PROMESA, where the group of vulture funds that make up ERS Creditors seeks to collect most of this 2008 emission. But in August 2017, Gov. Ricardo Rosselló signed the “Law to Guarantee Payment to Our Pensioners and Establish a New Plan for Defined Contributions for Public Servants,” which practically eliminates the Retirement System.
That law eliminated employer contributions that paid part of the pensions and that at the same time guaranteed bondholder payments, and established a system where the employees make a specific contribution to a personal account, similar to the U.S. Internal Revenue Code’s 401(K) plans. Under this scheme, the contributions are the exclusive property of the participants, they are not subject to taxes or embargoes and are exempt from the participant’s creditor claims, except for debts owed to the Retirement System or to the government. The assets liquidated from the Retirement System would be transferred to the General Fund, from which accumulated pensions will be paid.
“The liquidation of ESR assets has already begun and is in process. In the wake of Hurricane Maria, the building suffered significant damage and is working with insurance claims at the moment, “said Anita Gregorio, press officer of the Financial Advisory Authority and Tax Agency (AAFAF), an agency is in charge the liquidation of the ESR.
According to the law “for this fiscal year 2017-2018, the General Fund will be disbursing approximately $2,000 million for the payment of accumulated pensions.” The law to manage pensions also establishes that a new Retirement Board will be created, which has yet to be named, and suggests a partial privatization of the pension plan, since the Retirement Board will have to hire an “administrator entity” that manages the new defined contributions plan. This law responds in part to the requirements of the fiscal plan certified by the Fiscal Control Board, which replaces the defined retirement plans in which the employer contributes to the pension, by defined contribution plans, where only the employee contributes what will be his pension.
“The Retirement Systems Administration disappeared for all intents and purposes. The new director (Luis M. Collazo) is a figure … In truth, (the System) became an equivalent to the 401K. The 401K is for life, but with this new modification it is not for life, but rather until the money that you have accumulated runs out. That is a big difference. If you ran out when you were 70 or 75 years old and you live to be 90 years old, then you don’t have any more money. From the time you are 75 to when you reach 90, you have to look for money everywhere else but from the retirement fund, that’s the new system,” said Roberto Aquino-García, current president of the Retirees Association and former chairman of the ASR’s Board of Trustees.
Appaloosa and Mason Capital, both from the group of firms that require payment of retirement bonds from the ERS Creditors in Title III, are on a list of investment funds whose executives are on the boards of organizations that advocate for the implementation of this type of pension plans similar to the 401K plans. Third Point, a vulture fund that has had Puerto Rico bonds, also appears on the same list, prepared by the American Federation of Teachers in 2015.
But on June 9, before the new retirement law was signed, ERS Creditors attorney Bruce Bennett of the Jones Day law firm, sent a letter to Paul V. Possinger, attorney for the Fiscal Control Board, expressing his concern about changes to the Retirement System. He argues that the System is an entity separate from the central government, and that PROMESA and no law allow this separation to be ignored.
“Some of the changes will affect the Retirement System’s properties… Our concerns intensified when we learned how the Retirement System issues are being handled today … When we asked about the role of the Retirement System’s Board of Directors, Suzanne Uhlan (attorney for the AAFAF agency), said the Board has no role,” the letter states.
Aquino retired after 30 years of service as auditor of the Comptroller’s Office, and was chairman of the Board of Trustees of the ARS when the bond issue of 2008 was made that is now in dispute under Title III of PROMESA.
“That issue was made with the purpose of improving the Retirement System’s situation, because the money that was received was not enough to be able to pay the pensioners. We had made a $2 billion request to the NPP legislature from during Aníbal’ [Acevedo Vilá] tenure. The Senate under [Kenneth] McClintock had approved it, but the House did not; There was a stalemate there. The System continued to pay pensions, but was seriously defunded and we began to see the future that is happening today,” said Aquino, who also chaired the Commonwealth’s Employees Association.
Aquino explained that before the bankruptcy process began, the Pro Retirees Movement united all the bonafide institutions that represent government retirees that wanted to defend their benefits. At the beginning of the bankruptcy process, nine members of the Pro Retirees Movement and Blanca Paniagua, president of the United Public Servants Union’s (SPU) retirees chapter, were appointed by the case trustee as the Official Retirees Committee. According to Aquino, the Movement represents almost 100,000 retirees from various organizations.
“We are going to oppose any adjustment that is excessive, but if it is a limited adjustment that we can face, because logically we want to cooperate with the island, we do not want to obstruct, we do not want to be a nuisance … The representation has been doing everything possible to convince the judge that she cannot adjust our pensions, because it would cause such serious damage that it could bring about a bigger humanitarian crisis than what we already have, apart from (hurricane) María, because María is a huge crisis. What I don’t understand is how an island in this situation, devastated, can pay any debt. That creates a huge uncertainty for me and it creates it for many retirees who think like me, and creates anguish … If we are in these conditions, with what money we will pay the debt?”
“The bondholders logically want their money but the bondholder knew that when they invested they had two bags: the one to win and the one to lose. We do not. We worked 30 years minimum to have a pension, contributing money from our pocket and not only that, had the government’s commitment that it would pay a pension in the future and that pension was until one died,” said Aquino.