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Swain’s World: Puerto Rico Fiscal Board Says Claims Still Pending

By on December 5, 2019

Mediation Team Says There May be new Debt Adjustment Plan; Ankura Consulting to Provide Financial Advice, Services to Government

Editor’s note: The following was first published in the Dec. 5 issue of Caribbean Business.

The Financial Oversight & Management Board’s Special Claims Committee revealed information to the U.S. District Court related to potential claims still pending in Puerto Rico’s bankruptcy process while the mediation team—named by Judge Laura Taylor Swain—said there may be a new debt adjustment plan for the commonwealth.

While it did not provide specific names, the fiscal oversight board said there are potential claims against underwriters and certain other third parties related to bond issuances.

Meanwhile, Puerto Rico’s Fiscal Agency & Financial Advisory Authority (Aafaf by its Spanish acronym) extended the engagement of Ankura Consulting Group as Independent Registered Municipal Advisor (IRMA) for matters related to the commonwealth, its instrumentalities and public corporations.

“The authority [Aafaf] is represented by and will rely on its IRMA, Ankura Consulting Group LLC, to provide financial advice and services to the government in connection with transactions involving municipal securities of the government that are currently outstanding and/or municipal securities to be issued in the future in the form, or as a result of, new issues, refundings, exchanges and/or restructurings,” Aafaf said.

On the other hand, the mediation team, in a report issued Nov. 27 revealed there may be a new plan of adjustment for the central government.

The mediators, led by Judge Barbara J. Houser, the chief banjruptcy court judge for the Northern District of Texas, recommended that the stay imposed in July be lifted for litigation on the validity of certain general obligation (GO) and Public Buildings Authority (PBA) bonds as well as the rights of holders of revenue bonds issued by certain island instrumentalities, such as the Highways & Transportation Authority (HTA).

On July 24, Judge Swain imposed a 120-day stay and mandatory mediation on adversary proceedings and disputes including those related to the PBA and Employee Retirement System bonds as well as disputes related to the HTA. The stay and mandatory mediation in October were extended until Dec. 31.

However, the fiscal board, the government and various creditor groups remain in negotiations “regarding the terms of a possible amended plan of adjustment,” Judge Houser said.

“If successful, these negotiations could result in the filing of an amended plan of adjustment that differs from, and has materially more creditor support than, the current plan. The filing of such an amended plan and attendant disclosure statement could cause any scheduling and sequencing recommendations by the mediation team, with respect to the current plan and disclosure statement, to be of no consequence,” the bankruptcy judge said.

She recommended moving forward certain disputes that had been stayed by Judge Swain. They include disputes related to the validity of certain challenged series of GO and PBA bonds, the secured or unsecured status of claims on GO and PBA bonds, and the rights against the commonwealth of holders of revenue bonds and other debt issued by certain instrumentalities, such as the HTA, the Puerto Rico Infrastructure Financing Authority (Prifa) and the Convention Center District Authority.

“These issues are among the most fundamental and pivotal in the Title III cases [under the Puerto Rico Oversight, Management & Economic Stability Act (Promesa)]. They affect tens of billions of dollars of bonds and have the potential to drive overall restructuring outcomes. Rather than remain stayed any longer, litigation thereof should begin (or recommence, as the case may be) as soon as practicable,” Judge Houser said.

On Nov. 25, the fiscal board asked the U.S. Supreme Court to decline to hear a case in which Assured Guaranty and other bond insurers challenged an appeals court decision that barred bondholders from enforcing special revenue liens during a municipal bankruptcy.

On Sept. 24, the HTA and monoline bond insurers Assured Guaranty, National Public Finance Guarantee and Financial Guaranty Insurance Co. asked the top court to review a First Circuit decision issued in March that the bankruptcy code does not allow bondholders to force payment on special revenues. Assured said the Supreme Court should not take up the case because the bankruptcy code does not permit it.

“The bankruptcy code permits but does not compel debtors to make payments on special-revenue bonds or creditors already in possession of the debtors’ revenues to apply them to outstanding debt,” the board argued. “While Assured might prefer to engraft compulsory language onto the provision’s text, the First Circuit correctly refused to do so, and that conclusion does not warrant this court’s review.”

In another case filed with the Supreme Court on Sept. 24, the board said bond insurer and holder Ambac mischaracterized a First Circuit Court of Appeals decision to get the court to review the case.

On Sept. 23, Ambac asked the court to review a decision that allowed the diversion of special revenue, such as gasoline and oil taxes, away from HTA bonds. The First Circuit Court of Appeals ruled that Promesa prohibits the Title III court from interfering in fiscal board decisions, which allowed the diversion.


The Chamber of Food Marketing, Industry & Distribution (MIDA by its Spanish acronym) recently argued that the federal government has no explanation to deny Puerto Rico the same supplemental nutrition assistance program (SNAP) it provides residents stateside.

“It is Congress’ responsibility to provide funding for nutritional assistance to every [U.S.] American family, no matter where they live…to allow them a basic level of sustenance and have a dignified life,” MIDA said in a filing last week in Peña Martínez v. Alex Azar, U.S. Department of Health.

Continued from print issue:

The Chamber of Food Marketing, Industry & Distribution (MIDA by its Spanish acronym) recently argued that the federal government has given no explanation for denying Puerto Rico the same Supplemental Nutrition Assistance Program (SNAP) available stateside.

“It is Congress’ responsibility to provide funding for nutritional assistance to every [U.S.] American family, no matter where they live…to allow them a basic level of sustenance and have a dignified life,” MIDA said in a filing last week in Peña Martínez v. Alex Azar, U.S. Department of Health.

The case argues that the federal government cannot discriminate against Puerto Rico residents when providing SNAP—also known as food stamps—supplemental security income and Medicare low-income subsidies.

“Congress’ withholding of the application of the full benefits of the SNAP program, among the others challenged in this case, to [U.S.] American citizens and others residing in Puerto Rico, can only be interpreted as irrational, arbitrary, speculative, unsupported and devoid of any plausible justification,” MIDA argued. “How…this discriminatory and unconstitutional conduct, and hidden attitude toward the American citizens and other qualified residents of Puerto Rico, has been in effect for 38 years is a disgrace to the republic that stands for liberty, justice, due process and equal protection for all.”

The United States relies on rulings from 1978 and 1980 that allow territorial residents to receive fewer benefits in part because they do not pay federal income taxes. MIDA, however, argued that these reasons no longer apply. Puerto Rico contributed $3.4 billion to U.S. coffers in 2018, more than all other territories combined.

MIDA also said parity in SNAP benefits will be economically beneficial to Puerto Rico. One of the economic sectors most benefited by the parity between the island’s Nutrition Assistance Program (NAP) and SNAP is the retail sector, such as supermarkets. Corporations related to personal consumption would have seen direct and indirect effects of the initial $368.7 million in NAP parity in their sales.

“Thus, with parity in NAP and in SSI [Supplemental Security Income], the poverty rate in Puerto Rico would have probably been reduced to 30 percent in the 2016. Direct funds related to parity in SSI and NAP would have represented an additional $3.02 billion in the Puerto Rico economy, 4 percent of Puerto Rico’s 2016 gross national product. Overall, this would have created 39,026 additional jobs, including 18,012 direct and 21,014 indirect jobs,” MIDA said.

Several State Insurance Fund unions announced they were going to appeal a recent ruling by Judge Swain that dismissed their case. The unions argued that Promesa violates the U.S. Constitution’s ban on involuntary servitude and voting rights, and the federal law infringes on multiple conventions and international agreements on human rights.

Judge Swain said she lacked subject-matter jurisdiction to issue a ruling in the case because the plaintiffs did not suffer a real injury but were merely broad grievances related to the U.S. treatment of the Commonwealth as a territory.

The lawsuit was filed last year by the Hermandad de Empleados del Fondo del Seguro del Estado Inc., the Unión de Médicos de la Corporación del Fondo del Seguro del Estado Corp. and several individuals last year.

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