Puerto Rico gov’t, Retirement System creditors strike key stipulation
SAN JUAN — The Puerto Rico government would set aside more than $90 million through the next three months and a half, as well as pay roughly $14 million monthly in interest payments due through October—including a missed payment on July 1—according to a stipulation that seeks to “adequately protect” certain bondholders of the island’s Employees Retirement System (ERS).
The document filed late Friday by the island’s financial control board and a group of ERS bondholders is now pending federal Judge Laura Taylor Swain’s approval, which would put on hold until Oct. 31 the creditor group’s legal action against the commonwealth as part of the ERS’s bankruptcy case under Title III of Promesa.
It is the first Title III creditor group that successfully strikes a deal following legal action seeking relief from the bankruptcy stay and adequate protection over the loss of collateral that secures payment of commonwealth bonds.
The ERS bondholder group argues it has a lien over employer contributions that were pledged to bonds issued by the island’s government employees retirement system. The commonwealth government ceased to transfer employer contributions to the ERS, as it switches to a pay-as-you-go system to cover payment of retiree benefits. The government also seeks to sell available ERS assets to pump additional money into the general fund that would help it cover the roughly $2 billion in pension costs this fiscal year.
In a June 28 hearing, Judge Swain ordered the parties to negotiate a stipulation by this week that could avoid a quick judgment by her over the matter. After two extensions to this week’s deadline, the government and the ERS bondholder group struck yet anther stipulation, the third one since the first creditor action against ERS was filed last year.
According to the agreement filed Friday, the commonwealth would set aside $18.5 million in a segregated account on July 31, Aug. 31, Sept. 31, Oct. 31 and two days after Judge Swain’s approval of the stipulation, in addition to any money related to employer contributions made by the commonwealth to the ERS.
The stipulation, moreover, calls for payment of some $14 million in interest due July 1 and missed by the ERS, after commencement of its Title III bankruptcy case. The ERS would also have to pay subsequent monthly interest payments until Oct. 1, or about $42 million in total. These payments would be covered by funds set aside by the commonwealth since January, pursuant to a previous stipulation struck between ERS and its creditors early this year.
Furthermore, on or before July 21, the Puerto Rico government will commence an adversary action to have the court decide over the “validity, priority, extent and enforceability” of the liens and security interests asserted by the ERS bondholders, as well as the commonwealth’s rights over employer contributions received by ERS in May.
According to a proposed schedule for this action—which includes discovery by each party through the next three months—Judge Swain would hold a key hearing on the dispute by Oct. 31, by which time parties expect to solve the commonwealth’s declaratory relief action.
The use of the $18.5 million monthly set asides would depend on Judge Swain’s final decision over the respective rights and remedies asserted by the commonwealth and its creditors.
Other commonwealth creditors, particularly of the Highways & Transportation Authority (HTA), also seek a similar relief to that initially petitioned by the ERS bondholder group.
The island’s financial control board —as representative of the commonwealth and its entities— filed on May 21 a Title III bankruptcy case on behalf ERS, joining the central government, Sales Tax Financing Corp. (Cofina) and HTA. Most recently, the island’s Electric Power Authority also filed for Title III bankruptcy protection.