Bond insurers, Puerto Rico face off on revenue bonds

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Bond insurers argued with the Puerto Rico Oversight Board on Thursday as to whether Puerto Rico revenue bonds’ pre-bankruptcy conditions shield them from bankruptcy impairment.

The parties made their arguments in the second day of an omnibus hearing in the Title III bankruptcies for several Puerto Rico bond types. The hearing was held telephonically and presided over by Judge Laura Taylor Swain.

Puerto Rico bankruptcy Judge Laura Taylor Swain
Puerto Rico bankruptcy Judge Laura Taylor Swain didn't give an indication of her sympathies in Thursday's hearing on revenue bonds.

At stake are about $4.1 billion of Puerto Rico Highways and Transportation Authority bonds, $2.2 billion of Puerto Rico Infrastructure Finance Authority bonds, and $386 million of Puerto Rico Convention Center District Authority bonds.

Bond insurers Assured Guaranty, Ambac, and Financial Guarantee Insurance Corp. were calling on the court to lift the bankruptcies’ automatic stay provisions on those entities to allow the insurers to sue for what they say is their rights to bond payments. The insurers wrap about $2.95 billion gross par of the HTA bonds and additional amounts of the other two bond types.

Swain didn’t indicate that she was more sympathetic to one side or another.

She said Thursday’s hearing was a preliminary one, to see if it made sense to have more hearings on the topic and, if so, what form they should take. She said she’d take the topic under advisement and later issue a ruling.

Speaking of the HTA bonds, Attorney Mark Ellenberger, representing bond insurers, said Puerto Rico government adopted excise tax statutes gave ownership of the pledged taxes to the HTA for the benefit of the bondholders. The laws required that the money be kept separate from the commonwealth government’s General Fund.

The statutes say that the revenues “shall be used solely” for the payment of the bonds.

Swain asked if Ellenberger believed that the use of these words didn’t just indicate a “statutory direction” but also indicated a “statutory lien” had been created, even though the words “lien” and “pledge” were absent. Ellenberger said that he did.

Ellenberger also said that the money had been pledged to the HTA and not the commonwealth government and this also supported the bondholders’ claims to it.

Ellenberger said that the language creating the lien could have been clearer but that it was fairly clear. He said that the bonds’ official statements say that the excise taxes are pledged to bondholders.

Attorney Atara Miller spoke for the insurers against the Oversight Board’s arguments that their claims had been preempted in one of three ways.

According to Miller, the board said that one legislature couldn’t bind another legislature with laws and contracts. Miller said the U.S. Supreme Court had repeatedly rejected this.

Miller said the board argued that Title II of the Puerto Rico Oversight, Management, and Economic Stability Act had preempted the claims by giving the board total authority over fiscal plans and budgets. Miller says there are sections of the act that clearly prevent the board from preempting all promised payments of funds.

Finally, Miller said the board said PROMESA Title III preempted bondholder rights. Miller said the act explicitly recognized secured claims.

Regarding the PRIFA bonds Miller said the board is claiming that bondholders have no interest in the revenues until they are deposited into bondholder accounts. Miller said this was nonsense as the bond documents uses the words “pledged” for the revenues 50 times.

Miller said that the CCDA money, unlike the money for the other two authorities, never enter commonwealth government accounts. Instead it goes directly to the Tourism Company. She said the bondholders were beneficial owners from the time the revenues were collected.

In response, board Attorney Martin Bienenstock said that there had been contractual promises to pay the bondholders but that the bankruptcy overruled these. He said that in the acts Miller cited there was no language indicating a lien.

Bienenstock said that the HTA bond documents, broadly read, only grant security interests to money that the authority has received. The board’s position is that the authority, since the onset of the HTA bankruptcy, hasn’t received the excise taxes, since they’ve been diverted to the commonwealth.

Speaking on behalf of the Puerto Rico Fiscal Agency and Financial Advisory Authority, Attorney Elizabeth McKeen said that the bond insurers use contradictory arguments with the three different bond types. McKeen said their position is: “No matter what the facts are, we should win.”

Unsecured Creditors Committee Attorney Luc Despins said that lawyers have long known the words to create a lien in documents and these are absent in the relevant bond documents.

Ellenberger later said that one doesn’t necessarily have to have the word “lien” in a document for one to exist.

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Puerto Rico Puerto Rico Highway & Transportation Authority Puerto Rico Infrastructure Financial Authority Commonwealth of Puerto Rico