(Marc Daalder)– Amherst College has investments with three hedge funds which, between them, hold some $1.4 billion in Puerto Rican debt and are suing the island’s government over it, an AC Voice investigation has uncovered. These revelations come as Yale and Harvard Universities’ involvement with the island’s debt attract considerable criticism.
Public disclosures by companies suing the Puerto Rican government to ensure continued debt repayments show that the Baupost Group, Centerbridge Credit Partners, and Värde partners hold $930m, $389m, and $136m, respectively, in bonds issued by the island’s government. A leaked document confirmed to be authentic by the College Investment Office indicate that Amherst has invested part of its endowment in these funds.
In fact, in 2014 Amherst paid the Baupost Group $2.7m in fees in order to invest in at least one or more of its funds, according to publicly available 990 forms filed with the IRS. Amherst has chartered the Baupost Group for the same purpose in previous years, paying $2.9m in fees to the fund in 2013 and 2012.
The investment office declined to comment on Amherst’s investments in specific funds, citing confidentiality agreements and Board of Trustee policy, but did confirm the authenticity of the document in AC Voice’s possession. The College’s Chief Financial Officer Kevin Weinman told AC Voice that Amherst does not hold direct investments in Puerto Rican debt. He also acknowledged that the public nature of the 990 forms allowed him to confirm that “the College was an investor in at least one Baupost fund during those years,” but would not comment on the amounts invested in Baupost or other funds, then or now.
|Decagon Holdings (a.k.a. Baupost Group)||SV Credit (a.k.a. Centerbridge Partners)||Värde Partners|
|ERS Bonds (in USD)||N/A||$389,851,034||N/A|
|COFINA Bonds (in USD)||$930,929,019||N/A||$136,172,145|
He said that, “Much of the endowment is passively invested in funds directed by investment managers. It is always possible that at any point in time a small number of these funds might hold the debt of any particular sovereign entity, including Puerto Rico. Given how diversified the endowment is across asset classes and geographies, the proportion of endowment holdings in any particular corporate-issued or sovereign government-issued debt would be very small.”
Weinman went on to stress that bondholders are not usually malicious. “To be clear, [bondholders and bond issuers] both almost always mutually and equally benefit from the system…. When, as is usually the case, healthy issuers sell debt securities into the marketplace and can repay the obligation, investors can confidently rely upon interest revenues and principal repayments as scheduled.”
Following the disclosure of investments on the part of Yale and Harvard in funds holding Puerto Rican debt, including the Baupost Group, activists on both campuses demanded that their institutions write to Baupost and urge them to cancel their Puerto Rican debt. Instead of divesting or selling off the debt, this would help relieve the financial burden on the island. When informed of Amherst’s similar involvement with Puerto Rican bonds, activists with the Direct Action Coordinating Committee (DACC) told AC Voice that they would do the same.
“Rather than divestment, shareholder activism does seem like a better way of leveraging our power than just throwing our hands up and running away from it,” said Rojas Oliva ’19, a member of DACC.
When asked about the possibility of taking such measures, Weinman said, “Since the College is not an active, direct investor in Puerto Rico debt, I can’t offer an official view on the very complicated question of the resolution of Puerto Rico debt.” He explained further, “Investment funds generally are pooled investments, which means investors in those funds cannot and do not direct individual holdings.”
Weinman added, “I would imagine that one element of a comprehensive approach toward any beneficial path forward would include a wise approach towards debt restructuring that leaves a more manageable burden of prior borrowings while still maintains the access to capital that will be needed for infrastructure rebuilding.”
The story of how Puerto Rico issued billions of dollars in bonds and how vulture funds bought them years later at record low prices is a convoluted one. Long before Hurricanes Irma and Maria devastated Puerto Rico’s fragile infrastructure, the territory faced a seemingly-insurmountable financial crisis. Prior to 2006, Puerto Rico had been a beneficiary of favorable tax laws that aided economic development. That year, however, these laws were fully repealed, finishing a process begun a decade earlier under President Clinton.
This federal mismanagement of the island’s finances – although it is partially autonomous, Puerto Rico has little control over its own financial direction – led to the taking of unpayable debts. It attempted to ease its financial burdens by issuing bonds, which allowed the island to bring in billions of dollars in loans to shore up its economy.
The same year as the favorable tax laws expired, the island’s government passed Law No. 291 which established a corporation to issue bonds backed by the Puerto Rican sales tax. This meant that about half of the revenue from the sales tax – bumped to 11 percent by the same law – would go to bondholders instead of Puerto Rican pockets. The corporation, COFINA, proceeding to issue billions of dollars in bonds over the next decade. By June 30, 2014, it had more than $16.6 billion outstanding payable bonds.
In 2008, Puerto Rico’s pension system began to go under. The Employee Retirement System (ERS) – the pension system for the public-sector, where 22 percent of Puerto Rican workers are employed – began to issue its own bonds that year, purchasable only by Puerto Ricans. As the financial situation worsened, the ERS allowed non-residents to buy bonds and vulture funds began scooping them up, as AC Voice alum Ethan Corey reports. Some $3 billion in ERS bonds have been sold.
Most bondholders are not bad actors – after all, it was necessary for companies to buy bonds if Puerto Rico was to recover financially. However, as bonds decrease in value, they are more likely to be bought up en masse as “distressed” debt. How the holders and issuers of distressed bonds negotiate their mutual obligations to one another is what brings in ethical considerations.
For example, while pension benefits have been cut 10 percent, holders of ERS and COFINA bonds have gone to court to ensure that money raised by employer contributions to pensions and the sales tax alike enters their pockets before those of the Puerto Rican people.
A lawsuit filed by a coalition of COFINA bondholders – and a subsequent investigation by The Intercept – revealed that the Baupost Group, one of the world’s largest hedge funds, owned almost $1b in Puerto Rican debt. Alongside Baupost’s $931m in bonds, the lawsuit disclosed $136m in debt holdings by another investment fund, Värde Partners, and billions more on the part of other funds.
While Baupost warred with Puerto Rico for its stake in the island’s debts, eight funds holding ERS bonds filed suit in July 2017 against ERS. At issue was ERS’ decision to delay repaying bondholders and instead depositing employer contributions into retirees’ pension accounts. The plaintiffs feared that “pension beneficiaries will receive 90 percent of the amount they are owed while ERS Bondholders will receive pennies on the dollar.”
One of the leading companies on the suit, SV Credit, was revealed by In These Times to be a subsidiary of the massive vulture fund Centerbridge Credit Partners. Its $389m stake in ERS bonds belongs to the fund through a convoluted series of shell companies.
Amherst’s involvement with Puerto Rican debt would seem to clash with its values, particularly after the College took in students whose home institutions had been crippled by Hurricanes Maria and Irma. In fact, another significant threat to education on the island is the austerity regime enforced in part by bondholders, which has forced the government to close more than 300 K-12 schools since 2010 and almost halved the University of Puerto Rico’s budget.
Huey Hewitt ’19, another DACC member, said, “A lot of activist intellectuals in the academy like to believe that at least they’re funneling these resources in the direction of producing knowledge which is helpful and accessible to movement-building within and outside of the academy but that’s not a sustainable model. It’s built off of the destruction of bodies that just happen to exist outside the academy.”
While Puerto Rican is education suffers from natural disasters and crushing debt burdens alike, Amherst’s endowment remains invested in the holders of that debt, likely profiting enormously. “It’s just a common theme,” Hewitt said, “Powerful institutions profiting off of suffering.”
Weinman, the College CFO, declined to comment on the record regarding the ethical implications of Amherst’s investments, but did stress that “It’s the Board of Trustees, not the Investment Office or me, that makes the decision not to invest in certain holdings, such as the South Africa divestment decree in the 1980s and the Sudan divestment decree that began in 2006.”
Whether the push to forgive Puerto Rican debt will succeed is yet to be seen. Protests at other schools which invest in Baupost, like Cornell, Yale, and Harvard, have received little or no response from university administrators but the broader push for debt forgiveness has garnered headlines in Reuters, the Wall Street Journal, and other major news outlets.
In the meantime, the Puerto Rican government has announced a plan to close another 300 public schools.