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Puerto Rico creditor group defends validity of Public Buildings Authority bonds

By on April 12, 2019

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But argues commonwealth’s debt limit was breached

SAN JUAN – The Lawful Constitutional Debt Coalition supported attempts to declare invalid $6.2 billion in Puerto Rico general obligation bonds issued in 2012 and 2014 because they violated debt limits but defended the validity of Public Buildings Authority bnonds.

The coalition, which includes holders of general obligation bonds and PBA bonds issued before 2012, nonetheless said $582 million in government facilities revenue refunding bonds issued by PBA in 2012, some $78.1 million in bonds issued by the Puerto Rico Infrastructure Financing Authority (Prifa) in 2015 and $233.6 million issued by Ports of the Americas in 2014 are illegal as well because, as commonwealth guaranteed debt, they should have counted toward the debt limit. The information is contained in filings Thursday by the coalition.

In January, the island’s Financial Oversight and Management Board and the Unsecured Creditors Committee filed a lawsuit to declare invalid some $6 billion in general obligation bonds issued between 2012 and 2014. Both called the PBA a sham used to issue debt that was not in the commonwealth’s name but payable through general revenues so it does not get post petition rent payments.

In December 2018, the UCC and the fiscal board filed a complaint seeking a declaration that certain leases between the PBA and agencies are disguised financing mechanisms and that rent due is not subject to priority payment.

The coalition defended the PBA, which reports 615 properties under its jurisdiction, has capital assets totaling $3.7 billion and more than 1,000 employees who provide maintenance, administrative and operational services to its buildings.

Since its creation by the Legislative Assembly in 1958, no court has suggested that the PBA was unlawfully created. PBA issued bonds to finance the construction and maintenance of its buildings. The Commonwealth also guaranteed the payment of principal and interest on PBA bonds through guarantees issued in favor of PBA bondholders. The practice of guaranteeing PBA bonds began in 1968, 10 years after the PBA’s creation.

The PBA derives its revenue from rent paid by its tenants and is used to pay principal and interest on its bonds.

Three years after the PBA was established, and before the commonwealth began guaranteeing PBA bonds, the Puerto Rico Constitution was amended in 1961 to prohibit the commonwealth from directly issuing bonds backed by its full faith, credit and taxes if the combined principal and interest to be due, as well as similar “direct obligations of the Commonwealth for money borrowed directly by the Commonwealth evidenced by bonds,” exceeded 15 percent of the island treasury’s average annual revenue for the two previous years. The same limitation or “constitutional debt limit” was also imposed for any guarantee to be given by the commonwealth.

“The Commonwealth was able to issue GO Bonds and GO Guarantees in 2012 and 2014 only because it did not include the payments that the Commonwealth made to the PBA in the prior fiscal year for principal or interest on PBA Bonds when determining whether it had debt capacity in 2012 and 2014,” according to the document written by the firms Reichard & Escalera and Quinn Emanuel Urquhart & Sullivan, LLP

According to one of the firms, PBA debt was not included because the government interpreted the constitutional disposition to mean debt guaranteed by the commonwealth was counted only if the commonwealth failed to pay its rent.

“The Commonwealth’s failure to comply with this Constitutional mandate resulted in the issuance of approximately $6.7 billion of purported full faith and credit GO bonds and guarantees in 2012 and 2014 that violated the express terms of the Constitutional Debt Limit,” the document reads.

However, it said the PBA was validly created and its bonds are undeniably constitutional, serving important public purposes over the past 60 years.

“We believe recent efforts to mischaracterize PBA debt are predicated upon a fundamental misunderstanding of the public corporation’s history and a strained reading of Puerto Rico’s Constitution that adds words that are not there while omitting words that are. Since the passage of the PBA Enabling Act in 1958, both the Commonwealth and every court that has reviewed the matter have found that the PBA is not an arm of the central government, but rather a validly established and separate entity. Indeed, numerous states have mirrored the PBA structure to design, construct, and develop critical government buildings,” coalition representative Susheel Kirpalani, of Quinn Emanuel Urquhart & Sullivan, said in a statement.

“Although the Commonwealth has guaranteed the principal and interest payments on PBA bonds since 1968, prior administrations and their advisors improperly omitted payments made by the central government on account of these guaranteed bonds. It is important to underscore, however, that leases between the PBA and its tenants, including the Commonwealth itself, openly and appropriately defined a portion of the Commonwealth’s payments as ‘Debt Service Rent,’ removing any doubt as to how the central government should have accounted for those payments in the debt limit,” he said.

“Had the Constitution been faithfully applied, GO bonds and guarantees issued after March of 2012 could not have been backed by the Commonwealth’s full faith and credit,” he added.

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