A federal court handed a victory to holders of Puerto Rico Employment Retirement System bonds Tuesday, one of bondholders' first legal victories since Puerto Rico started defaulting about a year ago.
On Tuesday U.S. District Judge Francisco Besosa ordered ERS to shift incoming employers' contributions from its operating account to a segregated account at Banco Popular de Puerto Rico. Besosa directed that the money is to remain in the segregated account until all parties agree on a different approach or the court orders the money to be moved out of the account.
The Employment Retirement System of Puerto Rico had $3.1 billion in bond debt outstanding as of July 2, 2016, according to the Puerto Rico government, none of it insured and all of it taxable.
Puerto Rico government employers normally make employer contributions to support the payment of senior pension funding bonds.
In 2016 Puerto Rico adopted emergency order 2016-31 that declared the ERS was in an emergency and suspended the obligation of the ERS to transfer employer contributions to the bond trustee.
In November Besosa ruled against the plaintiffs in the case concerning the ERS bonds as well as simultaneously ruling against several other bondholder plaintiffs in other cases. Some of the bondholders appealed the ruling to the United States Court of Appeals for the First Circuit.
On Jan. 11 chief appellate judge Jeffrey Howard, appellate judge Rogeriee Thompson, and Appellate judge William Kayatta, Jr.
However, they ordered Besosa to hold a hearing for the arguments of the lead plaintiff, Altair Global Credit Opportunities Fund, and its co-plaintiffs. The judges stated, "We note that the Altair movants' request for adequate protection here appears to be quite modest. They ask only that the employer contributions collected during the PROMESA stay be placed 'in an account established for the benefit of movants.' In light of ERS's representation that it is not currently spending the funds, but instead simply holding them in an operating account, this solution seems to be a sensible one."
On Tuesday Besosa ordered the segregated account to be set up and that all money not transferred since the start of the PROMESA litigation stay should be deposited in the account within five business days. He also said that in the future the ERS should transfer the employer contributions to the segregated account no later than the end of each month.
The segregated account will be "for the benefit of the holders of the ERS bonds," Besosa wrote. The order also makes clear the money will simply sit in the account until a court orders otherwise.
Besosa stated that his order doesn't preclude the ERS transferring the employer contributions to the bond trustee for payment of the bonds, as would normally be the case. He canceled a hearing in the case scheduled for Friday, apparently believing the plaintiffs would be satisfied with his order.
The ERS bonds are rated Ca by Moody's Investors Service, CC with a negative outlook by Standard & Poor's, and C by Fitch Ratings.
The ERS is currently making draws on its reserves to make its bond payments, said S&P senior director David Hitchcock. It has a total of $167 million in interest due this fiscal year, which extends to June 30, according to Puerto Rico.
