Puerto Rico municipalities ask Judge Swain to appoint committee

SAN JUAN — Eleven Puerto Rican municipalities are asking federal Judge Laura Taylor Swain to appoint an official committee that represents the island’s 78 towns in the island’s bankruptcy proceedings under Title III of the federal Promesa law.

They contend towns should be treated differently in the commonwealth’s debt-restructuring process than other creditors.

According to court documents filed Friday, the U.S. Trustee had rejected creating a committee to represent the island’s towns. To date, only two committees have been officially appointed by the court, representing unsecured creditors and retirees.

Puerto Rico Senate president puts municipalities at top of agenda

The motion was filed by an ad hoc committee of municipalities that comprises Mayagüez, Isabela, Quebradillas, Guayama, Cabo Rojo, San Germán, Adjuntas, Guayanilla, Guánica, Añasco and Barceloneta.

In justifying their request, the towns noted that the commonwealth used to direct more than $450 million in subsidies to the municipalities on a yearly basis.  The current budget only provides for $220 million, after the island’s financial control board called for cuts to these subsidies.

“Promesa establishes separate grounds for a committee, given the substantial claims which the municipalities have against not only the Commonwealth but several of its instrumentalities.  This Court’s directing the appointment of an Official Puerto Rico Municipalities Committee is legally appropriate and critical to the success of the reorganization effort,” the motion further says.

The towns further argue that cuts in their budgets, combined with the actions of the Government Development Bank over municipal deposits and loans, have made it impossible for them to access financial markets to provide services.

Puerto Rico GOs denied intervention in Cofina dispute

What’s more, the motion says that the dispute between general obligation (GO) bondholders and Sales Tax Financing Corp. (Cofina by its Spanish acronym) bondholders over the entitlement of the island’s sales tax revenues is also having an adverse impact on municipalities.

“The Puerto Rico Municipalities have an important and vested interest in the Title III Petitions because any plan of adjustment, and the budgets mandated by that plan, will directly affect each and every Municipality,” the document adds.

According to the towns, the U.S. Trustee declined the ad hoc municipalities committee’s request for the appointment of an Official Municipalities Committee because they are “government units” not “persons.” But the ad hoc committee says the U.S. Bankruptcy Code allows for the creation of the official committee, which would also save time and money because it would not require each municipality to represent itself in the commonwealth’s Title III cases.

The motion cites case law that show municipalities not only may participate in committees, but under the right circumstances, should have their own.  

The treatment towns will receive–both during the restructuring process and under any resulting plan of adjustment–will be different than that of any other creditor or parties in interest. No other official committee either can or wants to represent the claims, needs and viewpoints for which 78 mayors are responsible, the towns argue.

Bond insurer urges Gov. Rosselló to increase electricity rates

SAN JUAN — Assured Guaranty, a bond insurer that recently filed action to place the Puerto Rico Electric Power Authority (Prepa) in receivership, urged Gov. Ricardo Rosselló and the commonwealth’s financial oversight board to immediately green light an increase to electricity rates on the island.

“Prepa rate increase is long overdue. The longer a rate increase is delayed, the greater the funding shortfall faced by Prepa. Given the decline in oil costs and the low rates currently charged, we urge that Prepa, the commonwealth, and the oversight board act in a fiscally responsible manner and raise rates immediately,” stated Dominic Frederico, president & CEO of Assured, in a letter sent Friday to the governor and the board’s chairman, José Carrión.

Puerto Rico Gov. Ricardo Rosselló (CB Photo)

Earlier this week, Assured and other Prepa creditors holding a majority of the utility’s roughly $9 billion in debt filed a motion in federal court seeking the appointment of an independent receiver at  Prepa. The monoline and another bond insurer, National, also seek to have the court declare as valid a restructuring support agreement (RSA) struck two years ago by the government and Prepa creditors, but which the board failed to approve. The latter led to Prepa’s bankruptcy filing under Title III of the federal Promesa law.

Puerto Rico’s power utility creditors ask court to appoint receiver

In his letter, Frederico mentions that the cost of electricity in Puerto Rico has been a focal point of recent discussions concerning Prepa’s fiscal plan, as well as the most recent negotiations over the now-terminated RSA.

“This has been the case despite the fact that electricity rates have long been undercharged by Prepa, and have in fact declined precipitously over the past five years for the benefit of consumers and commercial users. Notwithstanding the foregoing, additional rate savings were agreed to by Prepa’s creditors through several recent rounds of RSA renegotiations,” the letter added.

Assured’s Frederico went on to say that the island’s fiscal board “inexplicably and unlawfully” failed to approve the RSA, which would have allowed Prepa to keep currently subsidized electricity rates for some time “before allowing for a gradual return to normalized levels that reflect the actual costs of running an island,” according to the insurer.

Assured further argues that debt service represents less than 20% of the overall rate structure of Prepa, so the utility must focus on improving operations and reliability rather than “extract yet more concessions from current capital providers.”

Prepa rates have decreased and are, currently, 19 cents per kilowatt hour, mostly due to lower fuel prices. Prepa creditors also say that relending arrangements reached during the past few years have also allowed the utility to charge lower rates to clients.

“From 2008 to 2014, the average electricity rates charged by various other electric utilities on other U.S. and Caribbean islands was approximately 33 cents per kWh. Over the same period, the rate charged by Prepa was approximately 24.7 cents per kWh, or 25% less than the comp set average,” Frederico stressed in his letter, which adds that recent reports show that oil prices will continue to fall in the near future.

The communication to the governor and the board chairman also mentions that Prepa is legally required to have rates that cover both current expenses and debt service requirements. The latter would have been covered by a three cent transition charge negotiated as part of the restructuring deal that the oversight board rejected.

A Chronicle of Prepa’s RSA Saga

“Thus, rates are artificially depressed and are not compliant with applicable law or the Trust Agreement. Failure to immediately increase rates to reflect the actual cost of providing electricity will perpetuate Prepa’s past failures—i.e., the failure to collect sufficient funds to responsibly manage and invest in the utility for the ultimate benefit of the ratepayers,” Frederico said.

Earlier this month, the fiscal board commenced a Title III bankruptcy proceeding on behalf Prepa, after a majority of board members failed to approve the RSA.

Puerto Rico bondholder group sue U.S. government

SAN JUAN — A group of Puerto Rico bondholders sued this week the U.S. government in a bid to receive “just compensation” from the federal government over the sale of assets of the island’s Employees Retirement System (ERS).

In a nutshell, the argument is as follows: the commonwealth’s financial control board established by the Promesa law requested and authorized the sale of these assets; the fiscal entity is federal for constitutional purposes; and, therefore, the U.S. government must compensate these bondholders for the board’s adverse actions.

In this April 3, 2017, file photo, the Senate side of the Capitol is seen in Washington. (J. Scott Applewhite, File/AP)

The group argues that the sale of ERS assets—through Joint Resolution 188 recently approved by the local Legislature—constitutes a taking by the State. Therefore, ERS bondholders must receive “just compensation,” as established under the U.S. Constitution.

Plaintiffs comprise several funds that own ERS bonds, namely Altair, Andalusian, Glendon, Mason Capital, Nokota, Oaktree, Ocher Rose and SV Credit.

According to the complaint filed July 19 in the U.S. Federal Court of Claims, the ERS creditors seek payment equal to the principal outstanding, along with accrued interest and legal expenses. The ERS has roughly $3.156 billion in debt.

ERS’ assets and employer contributions made by the commonwealth government to the system secure payment of ERS bonds.

“Specifically, working with and through the Commonwealth, the Oversight Board designed legislation transferring plaintiffs’ collateral to the Commonwealth without compensation of any kind,” the complaint adds.

As part of the approved legislation related to the island’s fiscal year 2018 budget, Joint Resolution 188 authorizes, among other aspects, the sale of ERS assets. That money—roughly $390 million according to estimates—would go to the general fund in a bid to help the central government in covering payments of pension benefits during this fiscal year, which amount to nearly $2 billion.

Payment of these benefits directly from the general fund responds to the commonwealth’s decision to move to a pay-as-you-go system amid ERS’ lack of cash to cover these obligations.

What’s more, federal Judge Laura Taylor Swain—who leads the commonwealth’s bankruptcy proceedings under Title III of Promesa—approved a temporary settlement between ERS and the bondholder group, through which the commonwealth government accepted to reserve more than $90 million for the next three months. It will also pay roughly $56 million in interests until next October.

According to the complaint, the stipulation called for the action filed by the group of ERS bondholders against the U.S. government. The agreement also establishes that during a hearing on Oct. 31, Judge Swain will make a decision on the dispute between the commonwealth and the ERS creditors.

A territorial board?

The ERS bondholder group’s complaint primarily centers on the argument that the island’s financial board is a federal entity.

“The Oversight Board is a federal entity: the federal government created it and controls it,” they argue.

Although the federal Promesa law clearly establishes that the board is an entity within Puerto Rico’s territorial Government—and will not be considered to be part of the U.S. government—the ERS bondholders argue that, for constitutional purposes, this is not the case.

“Notwithstanding this language [in Promesa], the [U.S.] Supreme Court’s decision in Lebron v. Nat’l R.R. Passenger Corp., 513 U.S. 374 (1995), holds that such statutory disclaimers do not speak to whether an entity is the federal government for constitutional purposes. Instead, such disclaimers only define the entity for other statutory purposes. Under the test set forth in Lebron, the Oversight Board is a part of the federal government for constitutional purposes,” reads the complaint. 

The fiscal control board—which represents the commonwealth and its entities—filed on May 21 the bankruptcy case under Title III on behalf of ERS, joining at the time the central government, the Sales Tax Financing Corp. (Cofina by its Spanish acronym) and Highways & Transportation Authority in bankruptcy proceedings. More recently, the board also filed a Title III case for the Puerto Rico Electric Power Authority (Prepa).

Puerto Rico gov’t extends emergency period under moratorium act

SAN JUAN — On Wednesday, Puerto Rico Gov. Ricardo Rosselló signed into law House Bill 1133, which extends the commonwealth’s emergency period under the Financial Emergency & Fiscal Responsibility Act until at least Dec. 31.

The fiscal emergency law, or Act 5 of 2017—this administration’s spinoff of former Gov. Alejandro García Padilla’s Emergency Moratorium & Financial Rehabilitation Act—allows the commonwealth to impose a moratorium on its debt service obligations, as well as to redirect, or claw back, certain revenues that previously covered public debt payments.

Puerto Rico Gov. Ricardo Rosselló and his representative before the island’s financial control board, Elías Sánchez. (CB Photo)

The emergency period was set to expire Aug. 1, after Gov. Rosselló extended its duration on April 30 via executive order. Act 5 originally provided for an emergency period that would last until May 1, but allowed the governor to extend it by an additional three months.

The new amendments to Act 5 redefine the emergency period’s term, which now runs until Dec. 31. After this, the governor may sign executive orders to extend it for six-month terms while the island’s fiscal control board is in place.

As the commonwealth embarks on bankruptcy proceedings under Title III of the federal Promesa law, a legal stay broadly applies to creditor actions that may arise from the government’s use of moratorium and fiscal emergency powers provided under Act 5.

House Bill 1133, moreover, amends other laws in a bid to increase government revenues. It also seeks to ensure compliance with the commonwealth’s certified fiscal plan, Public Affairs Secretary Ramón Rosario said in a written statement.

For instance, certain businesses will now have to remit the sales tax they charge on a bi-weekly basis, instead of monthly. This will apply to businesses whose average monthly sales tax deposits during the previous calendar year exceed $2,000 a month.

The recently signed bill also intends to increase collections of the island’s room occupancy tax by allowing entities such as Airbnb and Homeaway to collect the tax and send it directly to the commonwealth government.

Rosario stated that without this bill, “there was no legal responsibility for these companies to collect the room tax.” He added that the revenue-enhancement measures under House Bill 1133 will help the commonwealth improve its cash flow position.

Lastly, the measure also amends Act 3 of 2017—or the Act to Address the Economic, Fiscal & Budgetary Crisis to Ensure Government Operations—so that instead of sending quarterly reports on how they met obligations and targets under the law, covered agencies would do so every semester.

Puerto Rico GOs denied intervention in Cofina dispute

SAN JUAN — Federal Judge Laura Taylor Swain denied Thursday intervention to a group of Puerto Rico’s general obligation (GO) creditors in the interpleader action filed by Bank of New York Mellon (BNYM)—trustee of the Sales Tax Financing Corp. (Cofina)—with respect to pledged sales tax funds that guarantee payment of Cofina bonds.

On May 16, BNYM filed action that seeks to have the court determine how the trustee should proceed with sales tax funds under its possession amid conflicting instructions over said monies.

Meanwhile, a group of GO bondholders sought to intervene in the action, arguing that pledged sales tax funds belong to the commonwealth and thus should be used to cover GO debt obligations pursuant to the island’s Constitution.

“The members of the GO group are not Cofina creditors, and have no direct claim to the Interpleaded Funds,” the court order reads, as Judge Swain found that the GO group lacked standing to assert its claims under BNYM’s action.

The court had already ordered BNYM to hold the funds in escrow until the interpleader was resolved.

“This is a setback not only for GOs, but also for the commonwealth and its legal strategy,” one source said, in reference to the government’s plan to tap into Cofina funds and redirect them to the island’s coffers.

The court recognizes that the intent of both the government and the board is to pool Cofina funds into available resources for an eventual debt-restructuring plan, and that the board seeks to solve the dispute with respect to Cofina.

“The claim that the commonwealth is entitled or required to apply the Cofina trust funds to payment of the commonwealth’s obligations to GO bondholders is one of which the commonwealth, as a debtor in a related Promesa Title III proceeding, has control. The commonwealth is not a party to the instant adversary proceeding,” the order adds.

The document also establishes that “the GO group’s asserted interest in the interpleaded funds would exist only if the commonwealth’s yet-unasserted claim on those funds were successful.”

In March, the Ricardo Rosselló administration and the GO bondholder group issued a joint statement in which they announced that the government—even if it was not taking a “definitive position” on the matter—would seek “prompt and expeditious resolution of the claims asserted by the GO bondholders regarding the constitutionality of Cofina,” under the Lex Claims case filed by GO creditors. In a nutshell, Lex Claims intends to have a court declare Cofina funds belong to the commonwealth.

On May 5, Puerto Rico’s financial control board filed for bankruptcy protection under Title III of Promesa on behalf of Cofina, as it did with the commonwealth. A mediation process has been set to address, among other issues, the commonwealth’s dispute with Cofina bondholders.

Discovery rules set

After holding a hearing in Boston on July 5, U.S. Magistrate Judge Judith Dein—who was appointed to assist Judge Swain with Puerto Rico’s Title III cases—set the rules for discovery on the commonwealth government over the Cofina dispute.

The commonwealth had opposed the Cofina creditors’ discovery petition, as it believed it was too broad and would not help solve the merits of the controversy.

By July 7, government officials and Cofina senior creditors will have to agree on search terms “aimed at identifying documents in the possession of [the government] that concern proposed changes to the use of the dedicated sales tax revenues,” Judge Dein’s order reads.

If disputes over the discovery process remain by July 12, parties will notify the court so it can promptly solve these issues.

As for the discovery time period, it will span from Feb. 15 to present. Documents to be produced include “public statements to third parties,” as well as electronically stored information in computers and cellphones.

If the commonwealth government refuses to produce documents citing such privileges as deliberative process and attorney-client, it must explain the court why it is withholding them.

Puerto Rico’s power utility seeks to ensure fuel supply

SAN JUAN — The Puerto Rico Electric Power Authority (Prepa), which filed for bankruptcy protection last week, asked the court to authorize it to assume an extension to its fuel supply contract with Freepoint Commodities, its largest fuel supplier.

According to the motion submitted July 2 by counsel to the island’s financial control board—which represents the utility in the Promesa’s Title III bankruptcy process—the contract is essential for Prepa to maintain powerplants operating.

Puerto Rico’s electric utility files for Title III bankruptcy

On April 10, the utility and Freepoint agreed to amend the contract, extending its termination from October 2017 to October 2018. As part of the agreement, Prepa had to immediately ask the court to authorize the contract if the utility commenced a bankruptcy process under Title III of Promesa.

“The amendment ultimately provides Prepa a reasonable runway to operate while it proceeds through this Title III Case, and ensured a reliable and continuous source of fuel that might not be otherwise readily available in the context of a pending Title III,” Prepa stated.

The motion stresses that if federal Judge Laura Taylor Swain fails to grant the authorization within 40 days of Prepa’s Title III case commencement, Freepoint could seek to terminate the contract or impose worse payment terms.

Furthermore, Prepa also said it has engaged in periodic negotiations with labor unions, negotiated certain modifications to existing power purchase contracts, negotiated potential modifications to other supply contracts, and has had discussions with the developer of the proposed Aguirre OffShore Gasport. “Such negotiations and discussions are ongoing,” the utility added.

Prepa’s contract with Freepoint, initially signed in 2015, was the target of an ethics probe because of Stone Point Capital’s investments in both Freepoint and Millstein & Co., which was then advising the Puerto Rico government on its debt-restructuring efforts and conducting negotiations with creditors.

The power utility’s Title III filing lists Freepoint as one of its top 20 unsecured creditors, with a $60 million claim.

Puerto Rico’s electric utility files for Title III bankruptcy

SAN JUAN — Two days after it approved bankruptcy protection for the Puerto Rico Electric Power Utility (Prepa), the island’s financial control board filed Sunday a Title III petition for the public corporation in the commonwealth’s federal district court.

During the board’s Friday meeting, the body unanimously agreed that the public corporation could seek bankruptcy protection under Title III of the federal Promesa law, but it was uncertain when and if the board would ultimately file the petition.

On Sunday, July 2, the seven-member panel —as representative of Prepa— commenced the bankruptcy proceedings for the utility by filing the petition along with the utility’s 20 largest unsecured creditors.

The list of unsecured creditors includes Scotiabank ($553.2 million), Solus ($146 million), Freepoint Commodities ($60 million), EcoEléctrica ($44.8 million), AES ($44.1 million), JPMorgan ($34.4 million), Puma Energy ($19.9 million), and other claims related to litigation that amount roughly $1.2 billion.

Puerto Rico fiscal board rejects power authority restructuring deal

Both the island’s Financial Advisory & Fiscal Agency Authority (Fafaa) director, Gerardo Portela, and Prepa’s executive director, Ricardo Ramos, stated Sunday night that the bankruptcy process ensures the utility’s “uninterrupted operations.” Ramos added that Prepa will meet its “current obligations with employees and other essential suppliers.”

Earlier on Sunday, the island’s fiscal agent released a statement announcing the Title III filing, but immediately asked to ignore the communication, adding that an official statement would be released later.

After the governing body’s eighth public meeting held in San Juan on Friday, board Chairman José Carrión had said that they had “chose not to implement Title III immediately [because of] ongoing negotiations.”

FAFAA Director Gerardo Portela and oversight board Chairman José Carrión III (Juan J. Rodríguez / CB)

Earlier that day, Gov. Ricardo Rosselló announced the government had requested the board to commence a Title III bankruptcy case for Prepa, to ensure that the utility’s services are not disrupted.

“Prepa wishes to make a plan to adjust its debts consistent with the provision of liquidity in accordance with what is established in the Fiscal Plan,” reads the governor’s letter to the board, which adds that the administration wants to continue “good faith” negotiations, but under a Title III process.

In a 4-3 vote—so far the only action it has not taken unanimously—the board rejected earlier in the week a restructuring support agreement (RSA) between Prepa and its creditors that had been three years in the making. The board didn’t certify the agreement as a “qualifying modification” under Title VI of Promesa, thus putting on hold the overhaul of the utility’s roughly $9 billion in debt.

Before striking down the RSA, the board delivered Prepa creditors recommended changes to the RSA that, if accepted, would have paved the way for an eventual certification, but parties failed to reach a deal.

A group of Prepa bondholders stated that before the RSA expired Wednesday, they had offered an extension to the agreement, as well as additional liquidity to fully cover a $450 million debt payment due July 1, in a bid to keep negotiations alive.

“Unfortunately, other parties simply rejected our offer […] with limited explanation given,” reads a statement released Friday by the Prepa Bondholder Group. It adds that the offer is still on the table and the group doesn’t intend to sue the government, “unless and until a Title III process [begins], which would simply leave us no choice.”

As of Friday afternoon, only two bond insurers, National and Assured, had filed a legal action against the board over Prepa’s RSA, seeking to have the court declare that Promesa calls for the approval of the deal as it was preexisting agreement.

See Prepa’s Title III filing here.

University of Puerto Rico, bondholders strike agreement

SAN JUAN — At a time when the University of Puerto Rico (UPR) still seeks to assess the impact of steep cuts to its budget and draw up a fiscal plan, the institution will transfer, reserve or pay $40 million to its creditors, who agreed not to sue the UPR or the government for at least the next two months.

The UPR trustee, U.S. Bank Trust National Association, announced the agreement between the university and its creditors in a filing made Thursday. The deal would allow the UPR and its creditors to negotiate an out-of-court, debt restructuring agreement for the university’s $500 million in outstanding principal.

University of Puerto Rico’s Río Piedras main campus (Sheika Gómez/CB)

Under the arrangement, which would run until Aug. 31 and was negotiated by the island’s Financial Advisory & Fiscal Agency Authority (Fafaa), the UPR will make two transactions in favor of its bondholders, of $20 million each. The first one takes place Friday, June 30, while a second transaction would be made on Aug. 31.

In its notice, U.S. Bank Trust didn’t specify if these transfers will be directly covered by the university or by reserve funds under the trustee’s custody. According to the commonwealth’s fiscal plan, roughly $60 million were available in a debt-service reserve fund held by U.S. Bank Trust.

Pursuant to moratorium orders and legislation still in place, the UPR stopped transferring pledged revenues to its trustee. Debt service payments have been covered by U.S. Bank Trust with funds in reserve.

During the period in which the agreement is in force, the UPR must also segregate approximately $4 million of pledged revenues it receives and would otherwise cover its debt-service payments. Pledged revenues mostly include student’s tuition fees, which serve as a source of repayment of the debt issued by the UPR.

Both the commonwealth government and the creditors who signed on the forbearance deal agreed that it only covers matters relating to the UPR’s debt obligations, and not other causes of action that the parties may have over the rest of the island’s debt.

Meanwhile, the university still lacks a president, a fiscal plan and an internal budget. Its governing board just recently saw enough members to establish quorum, after more than a month of being inoperative due to several resignations to the UPR’s governing body.

Caribbean Business reported that the university’s governing board will resume its work on July 7. It seek to promptly address the presidency vacancy and financial matters such as the drafting and delivery of its fiscal plan and the approval of its budget.

Puerto Rico fiscal board warns certifications not subject to judicial challenges

SAN JUAN — Puerto Rico’s financial control board warned Thursday afternoon that the certifications it makes as part of its management of the commonwealth government’s finances are not subject to review by a federal court because the federal Promesa law says so.

That is why challenges by creditor groups over the validity of the island’s certified fiscal plan would be unsuccessful. According to the board, objections by creditors to the certified fiscal plan are aimed at having more money be directed toward debt service payments, than what the document establishes.

“The Oversight Board’s certifications are not even subject to being second-guessed by the Court,” reads the “status report” presented Thursday to federal Judge Laura Taylor Swain, a New York bankruptcy judge in charge of Puerto Rico’s restructuring cases under Title III of Promesa.

The fiscal board makes reference to Section 106 (e) of Promesa, which states that “there shall be no jurisdiction, in any United States district court, to review challenges to the Oversight Board’s certification determinations under this Act.”

The status report filed by the board —as requested by Judge Swain during the May 17 hearing—details the most recent interactions between the government and its creditors, including the disclosure of certain financial information from the commonwealth.

The document adds that although the board “wishes it could satisfy creditors’ desires for higher repayments,” it is “resolute” it will only certify plans that can create fiscal responsibility and achieve access to capital markets.

The board also talks against efforts by certain creditors to conduct discovery “as if the Court has jurisdiction over an action challenging the fiscal plan,” and points to actions filed by bond insurers Assured and Ambac that expressly challenge the certified fiscal plan.

“To be clear, creditors’ rights under the United States Constitution are protected. If a creditor believes its collateral is being taken for public use without just compensation, nothing prevents the creditor from requesting stay relief if it does not obtain adequate protection or just compensation,” the board says in the status report.

Under the certified fiscal plan, the government identified an average of $787 million in available cash to pay annual debt service over the next 10 years.

Access to the commonwealth’s financial data room 

The board also indicates in the document that since June 6, several creditor groups already have access to a “live” version of the commonwealth’s data room, which includes economic models in Excel that were used for the preparation of the fiscal plan and debt sustainability analysis. This information, however, is not available to the public.

The report also notes that, despite granting access to certain creditors, some continue to request more information mainly related to the deliberation process of the fiscal plan, government revenues and expenses, and analyses tied to debt-sustainability.

Although the board asserts it had answered many of these requests, it has refused to deliver certain documents, communications and analyses as they believe these are privileged and not subject to disclosure.

Supports appointment of mediation committee

On the other hand, the board supported Judge Swain in designating a group that comprises five federal judges who will act as mediators as part of the commonwealth’s Title III bankruptcy cases.

“The team can only enhance the prospects of success for Puerto Rico,” reads the board’s status report.

Yet, it also mentioned that if Judge Swain approves the appointment of two agents that would represent the commonwealth and Sales Tax Financing Corp. (Cofina by its Spanish acronym) as the board proposed in a June 10 motion of June 10, they will be able to negotiate some type of settlement aided by the mediation committee.

Hearing set for Puerto Rico’s Employees Retirement System case

SAN JUAN— U.S. bankruptcy Judge Laura Taylor Swain scheduled a June 28 hearing in the action filed by a group of creditors that hold Puerto Rico’s Employees Retirement System (ERS) bonds and are requesting “adequate protection” and a lift of Promesa’s stay under its Title III bankruptcy proceeding.

Judge Swain also ordered that motions opposing the request for stay relief and adequate protection should be filed seven days prior to the hearing. The group of ERS bondholders —which own roughly $2 billion in bonds and include Altair, Oaktree, Nokota, Glendon and funds managed by UBS, among others—own bonds backed by the government’s employer contributions.

Also, on Friday, the U.S. Trustee will hold the formation hearing for the Promesa Official Committee of Retired Employees, which will represent retirees in the Title III bankruptcy process filed for the  ERS. The hearing will be held in the U.S. Bankruptcy District Courtroom in Old San Juan.

As for the Altair case, movants are asking Judge Swain to lift the stay and grant adequate protection because of the commonwealth’s latest actions over its employer contributions to the retirement systems and that secure their ERS bonds. They allege that the government ceased to transfer money pay interest and will continue to do so as it would withhold its contributions for its public employees’ retirement, thus wiping out its collateral.

The group of creditors had presented an urgent motion for a hearing on June 1, which Judge Swain granted this week.

In January, U.S. District Court Judge Francisco Besosa held a hearing over a previous lawsuit filed by the investment funds that hold ERS bonds in September 2016, which the judge dismissed following a settlement deal between these creditors and the government in which the latter agreed to set-aside the money that would have gone to cover ERS debt-service.

The hearing in January had been ordered by the U.S. Court of Appeals for the First Circuit, which found that Altair plaintiffs should have been given the opportunity to present evidence that their funds were at risk of being depleted and needed the court’s protection.

In April, another settlement was reached in which the commonwealth agreed that set-aside money be used to cover upcoming interest payments on ERS debt.

But after the filing by the island’s financial control board for Title III bankruptcy protection for the ERS, the Puerto Rico government delivered “a notice (which was later rescinded) to the Fiscal Agent seeking to block the Fiscal Agent’s payment of the June 1 interest payment in contravention of the April stipulation,” reads the creditors’ action.

Under Gov. Ricardo Rosselló’s budget proposal for fiscal 2018, the general fund would completely fund annual pension benefits as the government moves into a “pay-as-you-go” system, as retirement systems are expected to run out of money. According to government estimates, it means a $2.5 billion charge to the general fund budget, which would amount to $9.56 billion.

Public Finance Editor Luis J. Valentín Ortiz contributed to this story.