Several bond insurers filed an adversary complaint in the Title III bankruptcy case for Puerto Rico concerning the treatment of Highways and Transportation Authority revenue.

Assured Guaranty, National Public Finance Guarantee, and Financial Guaranty Insurance Co. challenged the legality of the Puerto Rico government’s diversion of special revenue bond collateral that secures the bonds of the Puerto Rico Highways and Transportation Authority.

Matt Fabian, partner at Municipal Market Analytics said that MMA sees the situation very similarly to the bond insurers – holding that the authority’s bonds are special revenue bonds and should be treated as such under PROMESA.

Matt Fabian, Municipal Market Analytics

“This means no stay of payments to bondholders, although it could ultimately still mean a default once the restructuring is executed,” he said. “It seems unlikely that the court would side with the commonwealth and the board, but this isn’t a bankruptcy judge, and her decisions are less predictable.”

Title III is a bankruptcy process for Puerto Rico’s public sector debt found in the Puerto Rico Oversight, Management, and Economic Stability Act. The U.S. government adopted PROMESA in summer 2016.

In the complaint filed Saturday in the Federal District Court in Puerto Rico, the insurers are seeking a ruling that the use of the revenues for the bonds is not subject to the automatic stay on debt-related lawsuits found in PROMESA. Assured also asks the judge to rule that the commonwealth has violated the Bankruptcy Code’s special revenues protections and to order it to stop doing so.

The complaint names the Puerto Rico Oversight Board, Puerto Rico’s government, the HTA and several leaders within those entities as defendants.

“So far the commonwealth is focused too much on restructuring debt and not enough on fiscal reform economic development initiatives,” said Paul Kwiatkoski, managing director at Kroll Bond Rating Agency. “Continuing on this path will likely hurt their ability to access the capital markets in the future.”

The insurers said that the HTA’s bonds are secured by a gross lien on the authority’s toll revenues; gasoline, diesel, crude oil, and other special excise taxes; and motor vehicle license fees. The authority’s fiscal plan, Puerto Rico’s fiscal plan, and Puerto Rico’s recently passed Fiscal Plan Act allow these revenues to first be applied to paying authority expenses.

The bond insurers’ action follows on the heels of the board approving a fiscal plan for the HTA on April 28 which includes no payment of its debt through fiscal year 2026. It also falls on the heels of the board putting the HTA into Title III bankruptcy on May 21.

The HTA had $4.2 billion in debt outstanding as of February, according to the Puerto Rico certified fiscal plan. Of the $4.1 billion in bond debt, Assured wrapped $1.5 billion, FGIC wrapped $447 million, and National wrapped $706 million, according to their complaint.

Assured and National filed an earlier “adversary complaint” in the Title III process against the board’s March certified fiscal plan for the commonwealth.

“Almost every decision regarding the treatment of creditors under PROMESA is likely to be litigated. This will not be an easy process,” Fabian said. “If somehow the HTA bonds go unpaid, it could have systemic implications, in particular for weaker revenue bond projects. But really that shouldn’t be the case.”

Howard Cure, director of municipal bond research at Evercore Wealth Management, LLC, predicted a long, litigious process, saying it will be up to Title III Judge Laura Taylor Swain to coordinate and consolidate the myriad cases emanating from the various holders.

“Some of the major decisions will be based on the views of the supremacy of the Puerto Rico constitution and the ability to divert what may be categorized as ‘special revenues’ to cover general obligation debt as well as operations and pensions away from the specific enterprises and other legally separate funds such as sales tax revenues,” he said.

In the Detroit bankruptcy, Cure said, water and sewage revenues were considered secured classes and mostly removed from the city’s general obligation, lease and pension debt and obligations.

“It will be up to Judge Swain to determine if various enterprises of Puerto Rico will also have that special revenue designation or if the Puerto Rico constitution will allow some kind of clawing of these revenues,” said Cure.

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