Thursday, April 2, 2020

Ruling: Debtors not Required to Pay Certain Puerto Rico Bonds

By on January 29, 2020

SAN JUAN — On Jan. 13, the U.S. Supreme Court declined to take up a dispute related to Puerto Rico’s bankruptcy that sent shock waves through the $3.8 trillion municipal bond market.

The justices left in place last year’s rulings by the U.S. First Circuit Court of Appeals, which determined that debtors are not required to make payments on certain Puerto Rico bonds that are secured by special revenues while the issuer’s bankruptcy is in place. Typically, in a bankruptcy, a debt issuer continues to make payments on special revenue bonds, which are those secured by a stream of revenues such as tolls.

According to economists and observers, the top court’s action left a dark cloud over this type of debt, which could increase borrowing costs for local governments, schools and other issuers seeking to finance infrastructure projects.

In other bankruptcy news, Judge Laura Taylor Swain ruled on Jan. 21 that the Puerto Rico Electric Power Authority (Prepa) needs to adequately serve creditors or modify its request only to limit the rights of the creditors it has served, if it wants to use money from certain insurance premium claims.

On Dec. 26, Prepa sought an order to stop creditors from claiming or interfering with insurance proceeds for damages to its infrastructure, so the utility could use the money for its operations. Judge Swain said the service list was too small and ordered Prepa to serve all creditors. The matter was slated to be heard at an omnibus hearing Wednesday.

On another matter, Prepa contractor Cobra Acquisitions on Jan. 22 asked the court to lift the stay on lawsuits so it could seek $250 million in payment for work completed after Hurricane Maria destroyed the island’s electric grid. Prepa wants to wait until the outcome of a criminal trial before issuing a payment.

Prepa stopped payments, arguing that the criminal case, in which Cobra President Keith Ellison allegedly bribed Federal Emergency Management Agency (FEMA) officials to get the contract, may be relevant to whether Prepa had to pay for the work. The utility argues that, depending on the outcome of the trial, it may not need to pay Cobra if it engaged in illegal activity related to its contract for repair work after the hurricane.

The trial, however, has been delayed and will not begin until February. Cobra said the stay should be lifted because most of the $200 million in claims is not disputed.

Meanwhile, on Jan. 23, Judge Swain ruled Prepa employees cannot undo reductions to their healthcare benefits, arguing it had not exhausted all available remedies.

Utier, the Irrigation & Electrical Workers Union, sought to stop the Financial Oversight & Management Board (FOMB) from cutting healthcare benefits. The board had changed coverage, copay deductibles and employer contributions, as well as made it more expensive for employees with catastrophic illnesses than other employees.

Four Puerto Rico bond insurers argued Jan. 21 that revenue-bond disputes must proceed as enforcement actions instead of as adversary proceedings because that is what the FOMB wants.

Assured Guaranty, National Public Finance Guarantee Corp., Ambac Assurance Corp. and Financial Guaranty Insurance Co. argued there is a large difference. The Circuit Court has said such petitions must be done separately from the Title III bankruptcy process.

The insurers were talking about the First Circuit Court ruling that allowed the diversion of special revenues, such as gasoline and oil taxes, away from the Puerto Rico Highways & Transportation Authority bonds.

On the other hand, former Employees Retirement Systems (ERS) Administrator Héctor Mayol said in an affidavit that he did not consider the issue of whether $3 billion in bonds were illegally sold.

The oversight board is trying to invalidate the ERS bonds issued in 2008, saying the ERS did not have the authority to issue such bonds. The bondholders have been trying to pin down when the ERS determined it did not have the authority to issue bonds.

Mayol helped execute the underwriting agreement in 2008, when he worked for underwriter Samuel Ramírez, and the following year became ERS administrator, which he was until 2013. He currently is legal counsel to the Committee of Retirees, which tried to stop bondholders from deposing Mayol.

The judge had said Mayol could answer questions in a sworn statement.

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