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Court green lights deal between Puerto Rico gov’t, Retirement System bondholders

By on July 17, 2017

SAN JUAN — Federal Judge Laura Taylor Swain approved Monday an agreement struck late last week by the Puerto Rico government and a group of bondholders of the island’s Employees Retirement System (ERS).

As proposed in the stipulation filed last Friday, she also scheduled a hearing for Oct. 31, during which the court expects to address a key dispute between the commonwealth and ERS bondholders over rights and remedies related to bonds secured by the government’s employer contributions to the retirement system.

According to the deal, the commonwealth will 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.

These actions will put on hold the ERS bondholder group’s petition for immediate relief and “adequate protection” as part of the ERS’s bankruptcy case under Title III of the federal Promesa law.

On or before July 21, moreover, the 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. During the Oct. 31 hearing, Judge Swain will address each side’s final arguments on these matters.


(Luis J. Valentín/CB)

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.

According to the agreement filed late Friday, the commonwealth will 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, or July 19, in addition to any money related to employer contributions made by the commonwealth to the ERS in late May.

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 will also pay subsequent monthly interest payments until Oct. 1, or about $42 million in total. These payments will 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.

The use of the $18.5 million monthly set asides will 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.

Read the fiscal board’s filing notice.

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