Puerto Rico debt case starts with squabble between bondholders

Puerto Rico’s $123 billion bankruptcy kicked off with the judge and creditor lawyers agreeing that a split between holders of general obligation and sales-tax bonds will dominate the case.

The dispute over who has the claim to revenue from sales taxes is especially pressing because a trustee for the sales-tax bonds, known as Cofinas, must decide whether to make a $16 million interest payment June 1.

Without ruling on the matter, U.S. District Judge Laura Taylor Swain told a packed courtroom in San Juan Wednesday that a hearing would be set sometime before that deadline to determine what to do with that money.

Puerto Rico filed separate cases two weeks ago under a specially crafted federal law that allows the commonwealth to use a bankruptcy-like process to reduce its staggering debts. One case is devoted to the Cofina obligations, while the other encompasses general obligation bonds and other debts. The cases will be jointly administered, meaning paperwork and other day-to-day matters will be consolidated, but will remain legally separate for now.

“The scope and scale of issues are frankly humbling,” Swain said. She urged the parties to work toward a resolution, saying it wouldn’t be helpful to litigate matters.

“Failure is not an option,” she said. “We cannot turn off all the lights and close the door on Puerto Rico.”

Oversight BoardMartin Bienenstock, a lawyer representing Puerto Rico’s financial oversight board, which filed the bankruptcy cases, told Swain that the conflict between general obligation bondholders and the Cofina investors must be tackled before a debt-cutting plan for the island can be submitted.

Lawyers for the Cofina holders disagreed with Bienenstock’s assertion that the commonwealth had yet to take a stand on how the sales-tax proceeds should be spent, saying that a fiscal plan the oversight board crafted this year redirects sales tax revenue to other expenses, including government services and the general obligation bonds. That plan has not been formally implemented.

Bienenstock, a partner at Proskauer Rose LLP, told the judge the two sides will try to work out a deal. Failing that, the oversight board will craft its own solution and present it to Swain, or simply let the parties duke it out in court.

“It’s no surprise it’s about the money,” Bienenstock said.

The case is In re Commonwealth of Puerto Rico, 17-03283, U.S. District Court, District of Puerto Rico (San Juan).

Bloomberg News
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