Bondholder group seeks disallowance of Puerto Rico Public Buildings Authority, certain GO bonds

Ad Hoc Group says fiscal board, unsecured creditors are choosing ‘to squander what little is left of Puerto Rico’s credibility with investors’

SAN JUAN – The Ad Hoc Group of General Obligation Bondholders has filed a conditional claims objection in Puerto Rico’s bankruptcy case related to the request by the island’s Financial Oversight and Management Board and the Unsecured Creditors Committee (UCC) to invalidate $6 billion in debt issued after 2012.

The fiscal board and the UCC filed a suit in January seeking the invalidation of $6 billion in general obligation (GO) bonds from three issuances in 2012 and 2014, contending these violated constitutional debt limits. The committee argued the issuances violated balanced budget provisions as well.

The board and the UCC have also filed a complaint against the Public Buildings Authority to have lease agreements between the PBA and agencies declared not true leases but financing mechanisms to allow the commonwealth to make improvements to leased properties.

Seen as financing mechanisms by the UCC and the board, they contend the rent is not subject to a priority payment under the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa) because the PBA was created to issue bonds to improve office space for the agencies. Therefore, obtaining the declaration that they are not true leases would leave some $600 million as not entitled to full payment but merely a potential unsecured claim.

In a petition filed earlier this week, the Ad Hoc Group said that although the board and the UCC claim the PBA is a “sham” intended to evade the constitutional borrowing limit, it seeks to invalidate not the PBA bonds but instead the $6 billion in GO bonds.

The group claims the board and UCC’s calculations of the debt limit are wrong and said they are choosing “to squander what little is left of Puerto Rico’s credibility with investors and to launch a multi-year feeding frenzy for the lawyers at Proskauer Rose LLP, Brown Rudnick LLP, and Paul Hastings LLP.”

“The amounts billed by the Board’s and the UCC’s professionals as a result of this reckless litigation strategy, as well as billions of dollars of other professional expenses previously incurred or projected, will be paid by Puerto Rico,” the Ad Hoc Group said in a statement Thursday.

The group contends in its suit that the only remedy should be to invalidate all claims related to the PBA bonds and leases, “or, failing that, to invalidate all PBA Bonds and GO Bonds that fall within the Selective Claim Objection’s ‘logic’,” adding that the “sole remedy should not be to invalidate” only the $6 billion in GO bonds.\

“If the Board’s and UCC’s Objection is otherwise right, its own logic dictates that the onus should fall on the claims targeted by the Ad Hoc Group’s Objection,” the group said.

Boston ruling raises muni market concern

In related news, a recent U.S. First Circuit Court of Appeals ruling on an appeal brought by Assured Guaranty Corp. and three other insurers has raised concern in the municipal bond markets.

The board filed for Title III bankruptcy on behalf of the Highways and Transportation Authority (HTA) on June 3, 2017, and shortly thereafter, Assured Guaranty Corp., Assured Guaranty Municipal Corp., Financial Guaranty Insurance Co. and National Public Finance Guarantee Corp. sued, contending that HTA’s failure to make payments violated certain bankruptcy code statutes and seeking relief from the court.

After analyzing the law, Judge Laura Taylor Swain concluded that “Promesa Section 305’s prohibitions on interference with debtor property interests, revenues and use and enjoyment of income-producing property” deprive her court from interfering with the debtors’ dealings.

On March 26, the U.S.First Circuit Court of Appeals affirmed a U.S. District Court ruling that dismissed the amended complaint from the insurers that special revenues pledged to bondholders are only exempt from Promesa’s stay on litigation if the government or entity voluntarily agrees to continue to pay bondholders. The court said timely payments were not mandatory.

The First Circuit ruling is contrary to case law precedent that special revenues must continue to be paid, raising the concerns of bondholders and municipal market publications.

MuniNet Guide stressed the potential adverse effect to the municipal market if there were any stay in the timely payment to the bondholders of pledged special revenues collected postpetition.

“These adverse effects include the impairment of needed access at a reasonable borrowing cost to revenue bond financing for essential infrastructure improvements and other services. The First Circuit response was unmoved by the dire consequences to the municipal market resulting from its ruling by stating, ‘Our duty is to interpret the law not to re-write it,’” the publication wrote.

The publication said the court ignored past rulings and practices by Chapter 9 bankruptcy courts.

“This is the expectation of the municipal market and commentary, both legally and by credit analysts, that timely payment of special revenues postpetition is essential to access to the market and lower borrowing costs that revenue bond have up to now enjoyed,” it said.

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