Monday, October 16, 2017

Judge Swain listens to evidence against Puerto Rico highway authority

By on August 8, 2017

SAN JUAN — On Tuesday, federal Judge Laura Taylor Swain held an evidentiary hearing as part of the legal action filed by Peaje Investments LLC, a creditor group that seeks to force the Puerto Rico Highways & Transportation Authority (HTA) to resume the transfer of toll revenue that secures payment of its bonds. 

After delivering testimony for more than six hours and amid Judge Swain’s concerns about the voluminous evidence, both sides agreed to pare down the list of exhibits and the number of objections. The summations will be due in writing Monday. The judge had originally set them for Thursday.

Peaje Investments, which holds $65 million in HTA bonds, is suing the public corporation and the commonwealth to stop the government’s clawback of toll revenue, or the redirection of pledged resources to cover “essential services.” The mechanism was triggered by the commonwealth since late 2015 amid the government’s cash crunch.

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A core issue in the suit is whether Peaje has a statutory, first priority lien over the toll revenues. The creditor group argues it should not be impaired by the automatic stay that went into effect after the HTA filed for bankruptcy under Title III of Promesa. Its lawyers contend the money is pledged special revenue under the Bankruptcy Code and should be turned over into an account maintained by the fiscal agent, the Bank of New York Mellon, to pay the bonds.

Peaje’s lawyer, Eric Brunstad, said that under the fiscal plan, these revenues will not be paid for the next 10 years, thus the creditor group should be “adequately protected.” He added that HTA’s 1968 resolution authorizing the issuance of bonds and the public corporation’s enabling act allowed HTA to impose a valid lien on the toll revenues being clawed-back” today.

“This is a lien unilaterally imposed by the 1968 resolution that has force of statute and by the enabling act itself,” Brunstad argued, adding that the automatic stay cannot eliminate the lien because it is statutory.

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Allan Brilliant, another lawyer for Peaje, said HTA can continue to pay its debt, noting figures from the public corporation that show toll revenues in PR-52, which make up 80% of the toll revenues, have gone up by 1%, while PR-20 has seen a 3% increase. Toll revenues in PR-53 went down.

Brilliant also said that if Peaje is not paid, it will not be able to get its money back down the road. He noted a recent video of the governor stating that the government has about $1 billion in additional revenue, some of which could be used for the HTA.

Lary Alan Rappaport, a lawyer for the financial control board, which represents HTA in its Title III case, said HTA bondholders will not suffer irreparable harm because it would be paid down the road, since toll revenues are perpetual. He also argued Peaje has a “contractual pledge” that is covered by the stay, and not a statutory lien.

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If Peaje is granted the injunction and the toll revenues go to pay bondholders, the HTA lawyer argued the creditor group will suffer in the long run because the roads will fall into disrepair, thus destroying “the value of any lien.” He added a substantial portion of the island’s roads are at the very end of their useful life.

“The relief that they seek will cause a harm they are trying to prevent,” Rappaport said. He further noted expert witness testimony that shows that taking away the $150 million in annual revenues generated by the toll roads will be detrimental to the economy.

During the lion’s share of the hearing, lawyers for both sides sought to discredit testimony from expert witnesses.

Thomas Stanford, a witness for Peaje, created a hypothetical model that concluded that toll revenues are finite and that the bondholders’ equity cushion would remain above 20 percent for 24 months only if the injunction is not granted. Yet he acknowledged in cross examination that he did not analyze equity further in the future and that his numbers were purely hypothetical.

Sergio González, a former HTA official who is now a consultant for the public corporation, and transportation expert Tyler Duvall established that the requested injunction would cause substantial harm to Puerto Rico’s transportation system.

Upon cross examination, González acknowledged that toll revenues are used to pay for the Urban Train, which is projected to lose $500 million over 25 years. He also said the HTA receives around $400 million in federal funds, about two years of total toll revenues, but often delays spending it.

The HTA consultant could not recall a single time in which the degradation of a road led to a reduced amount in toll revenues.

Duvall submitted testimony to the effect that 54% of the island’s roads are in poor condition. He said toll revenues are needed to repair non-toll roads, which generate traffic and revenue for those who have tolls.

“Without the network of non-toll roads providing access to and egress from the toll roads, the toll roads could not generate revenue,” he said in a declaration.

However, Duvall admitted in court that he did not inspect roads to establish their condition and relied on 2009 data for his conclusions.

Andrew Wolfe, an economist who advises the island’s financial control board and helped develop the commonwealth’s fiscal plan, provided expert witness testimony that stated that if the $150 million in total annual revenue generated solely from toll revenues were taken from Puerto Rico’s budget during the next 10 years, it would have a negative impact on real economic growth of -0.31% and reduce the estimated real economic growth for fiscal year 2026 to 0.7% instead of 2.6% as the board had estimated to support its fiscal plan impositions.

He also analyzed the impact on real economic growth that would occur if $290 million to $325 million, which is an amount approximately equal to the annual debt service on outstanding bonds issued by HTA, were taken out of the commonwealth’s budget. Wolfe concluded it would result in a -0.55% impact on economic growth.

The economist, who participated in the preparation of the Krueger report, said Puerto Rico’s economy must meet a 0.8% minimum real economic growth threshold to achieve fiscal sustainability.

During cross examination, Wolfe acknowledged using a multiplying factor that amplified the impact of his numbers. He acknowledged as board adviser, that there is nothing stopping the governor from using surplus in his budget to fund the HTA.

Peaje lawyers also attacked the credibility of Jonathan Arnold, an HTA expert witness, because three appellate judges in the past criticized him for bringing meritless fraud charges to “harass” the other parties. Arnold said he was not acting as an expert witness in the litigation the Peaje lawyers were referencing.

One of the fiscal board’s lawyers, Martin Bienenstock, said the HTA could run out of cash if it continues to pay all its debt, and signaled big repayment cuts for the authority’s creditors. 

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