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Municipal analysts seek Puerto Rico Highway Authority ruling reversed

By on May 17, 2018

SAN JUAN – The National Federation of Municipal Analysts (NFMA) has filed a friend-of-the-court brief with the U.S. Court of Appeals for the First Circuit in Boston seeking to reverse a local district court ruling in favor of the Puerto Rico Highways and Transportation Authority (HTA).

“We have filed this brief because the District Court’s decision, if upheld, would undermine protections expected by municipal bond investors, and would also likely result in higher borrowing costs for issuers going forward at a time when the nation’s significant infrastructure needs will need to be addressed,” federation Chairwoman Mary Francoeur stated.

Earlier this year, U.S. District Judge Laura Taylor Swain dismissed a lawsuit brought by Assured Guaranty Corp. and other insurers are seeking the continued payment of bonds that were secured by pledged special revenues, contending that she lacked jurisdiction.

Judge Swain’s ruling stirred the municipal market because bonds secured by pledged special revenue streams have long been protected in bankruptcy proceedings and payment of these revenues is exempt from the automatic stay on litigation.

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Unlike general obligation bonds, which are guaranteed by the full faith and credit of the island’s Constitution, special revenue bonds are pledged revenues supported by a specific activity, such as tolls or transportation. The lien on the debtor’s property remains even after a bankruptcy filing.

As Puerto Rico’s fiscal situation worsened, in 2015 the government transferred HTA revenue to pay other obligations. The public corporation’s bondholders were paid out from the corporation’s debt reserve funds. Afterward, monoline insurers paid bondholders after HTA failed to make more than $100 million in debt service payments. The HTA defaulted in July.

Subsequently, Assured Guaranty, Financial Guaranty Insurance Co. and National Public Financial Guarantee Corp. sued HTA and the government.

The NFMA’s brief argues the matter affects the municipal bond market and that it can “help to better educate the court about public finance issues and the functioning of the municipal marketplace…or avoid an adverse outcome which would cause significant disruption to the municipal marketplace by undermining a core principal [sic] upon which municipal analysis is founded.”

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The decision at issue primarily involved the interpretation of sections 922 and 928 of the U.S. Bankruptcy Code, which were incorporated into Title III of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa).

Judge Swain’s ruling “further allows a diversion of revenues for any expense or obligation of the issuer,” the entity said in a statement. “While this case is concerned with the Puerto Rico proceeding under PROMESA, the incorporation of the Revenue Bond Provisions into both the Bankruptcy Code and PROMESA broadens its application to bankruptcy proceedings affecting the entire municipal bond market.”

The NFMA, a nonprofit group of 1,500 members, said it feels the decision is an incorrect interpretation of the Revenue Bond Provisions, and if upheld, would reverse commonly held beliefs in the municipal bond market regarding the strength of the revenue pledge for revenue bonds during a bankruptcy proceeding.

“This, in turn, would undermine the underlying broad acceptance of revenue bonds by investors, and would increase borrowing costs for municipal issuers with pressing infrastructure finance needs,” the group said, adding “the District Court decision is wrong both as a matter of statutory construction and sound public policy.”

The HTA appeal is one of three Title III rulings before the Boston court.

Judge Swain dismisses Puerto Rico highway authority bondholders’ suit

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