Friday, August 18, 2017

A breakdown of second omnibus hearing on Puerto Rico’s bankruptcy

By on August 9, 2017

SAN JUAN — Shortly after 9:30 am Wednesday, and amid protests outside the federal court building in San Juan, Judge Laura Taylor Swain began a new hearing in Puerto Rico’s bankruptcy cases under Title III of the federal Promesa law.

Among the decisions taken, the judge rejected a request made by a group of island towns to appoint an official committee that represents them in the process.

Judge Swain also approved an important agreement between the government and certain creditor groups that established a procedure to put an end to the dispute between the commonwealth and Sales Tax Financing Corp., or Cofina, creditors. The goal is to have a court decision on this matter on or before Dec. 15.

The United States District Court for the District of Puerto Rico (CB photo/ Juan José Rodríguez)

The second omnibus hearing of the commonwealth’s bankruptcy cases took place once again in the U.S. district courthouse in San Juan, before a room packed with lawyers and advisers. There was a busy agenda, wit a host of issues discussed throughout the day related to the Title III cases of the central government, Cofina, the Highways & Transportation Authority (HTA) and the Electric Power Authority (Prepa).

The hearing began with statements by federal Judge Barbara Houser, who leads the team of mediation judges for the commonwealth’s bankruptcy proceedings. She explained that it is expected that the group will have a “game plan” ready by next week on the specific issues to be addressed in the process.

Judge reserves ruling on receiver for Puerto Rico electric utility

Within a month, mediation meetings on these specific issues will kick off, Judge Houser added.

As for the request by a group of Prepa creditors to place the utility under receivership—and ensure that Prepa charges sufficient fees to cover all its obligations—Judge Swain listened to arguments for roughly an hour.  She then reserved decision on this matter.

A bid to solve Cofina/Commonwealth dispute

Early during the hearing, Judge Swain approved the recently struck settlement between the government and certain creditors that seeks to solve the dispute over Cofina’s pledged funds. The dispute about who is entitled to the more than $700 million a year in sales tax money that guarantees payment of Cofina bonds is one of the main stumbling blocks in the restructuring efforts of the commonwealth’s public debt.

The stipulation—the second time it is filed—establishes a procedure whereby the parties will litigate the controversies related to the commonwealth/Cofina dispute in a bid to reach a court-ordered resolution by Dec. 15. As part of the procedure, agents will be appointed to represent the particular interests of Cofina and the central government.

The stipulation presented by the fiscal board’s lawyers states that if the pledged sales tax money is not available to the commonwealth by year’s end, the government would face serious cash flow problems after Dec.15, absent additional fiscal adjustments or financing.

No committee for municipalities

The request made by a group of 11 municipalities to create an official committee representing them was rejected by Judge Swain. According to the towns’ legal representation, this would leave towns “without a voice” in the Title III process, despite the steep cuts they have suffered.

The judge said that while she acknowledges the municipalities’ frustration over the reduction in funds received from the central government, town failed to prove a right or claim on that money, which would make them creditors, as defined by Title III.

Puerto Rico municipalities ask Judge Swain to appoint committee

Counsel for the U.S. Trustee, the central government and the board also argued that “unfortunately” applicable rules only allow committees for individuals. Therefore, municipalities would be barred from obtaining an official committee to represent them.

Judge Swain also rejected a request by the University of Puerto Rico (UPR) retirement trusts to create a new committee to represent government employees, or reconfigure the retirees’ committee so that includes an active employee of the UPR.

As for a petition made by the ad hoc group of general obligation (GO) bondholders to reconfigure the committee of unsecured creditors and distinguish constitutionally protected bondholders, the judge decided not to rule on the matter yet.

Discussion on debt probe postponed 

On or before Aug. 21, the court, specifically magistrate Judge Judith Dein, will address arguments in a petition to investigate the causes of Puerto Rico’s financial crisis. Initially, the issue was expected to be discussed during Wednesday’s hearing.

Fiscal board to investigate Puerto Rico debt

The committee of unsecured creditors recently asked to investigate bond issuances made by the commonwealth and the role of financial institutions such as Banco Popular, Banco Santander and the former fiscal agent, the Government Development Bank (GDB). However, the group recently agreed to postpone a hearing on their petition after stating that it is in discussions with the fiscal board in an attempt to reach agreements that make way for an investigation that is suitable to all parties.

Other issues addressed

Earlier in the hearing, the court approved the retention of several lawyers and advisers, as well as the fiscal board’s proposed interim fee payment protocols for legal counsel and advisers to the government, the board and the official creditor committees that take part of Title III bankruptcy proceedings. These costs will be covered by the debtor, in this case, the government of Puerto Rico. 

Judge Swain, moreover, approved a motion by the unsecured creditors committee to establish parameters for access to information by creditors. She also greenlit utility motions from Prepa and the government that seek to ensure continuity of services by contractors. The government also got an extension to extend the deadline to indicate which lease contracts of properties it will maintain and which it will reject, as allowed by Title III bankruptcy proceedings.

Meanwhile, most of the claims related to actions filed by HTA contractors, which seek to clarify their contractual situation with the public corporation amid the entity’s bankruptcy process, were adjourned and not addressed during Wednesday’s hearing.

One of the contractors, South Parcel, struck a settlement with the government whereby the HTA will catch up with missed payments and continue to honor its obligations with the contractor.

On Tuesday, Judge Swain held an evidentiary hearing in the action filed by Peaje Investments, a group of HTA creditors. The group of bondholders seeks to be compensated, arguing it was impaired by the loss of toll revenue that guarantees the payment of its bonds.

Judge Swain listens to evidence against Puerto Rico highway authority

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