The U.S. Supreme Court on Monday let stand a lower court ruling that bondholders have a perfected lien on local government revenue contributed to Puerto Rico’s pension system.
As result bondholders could claim 100 cents on the dollar on $3.2 billion of Employees Retirement System bonds rather than the 13 cents on the dollar that the Puerto Rico Oversight Board is allotting them in the plan of adjustment, said Chapman Strategic Advisors Managing Director James Spiotto. While they could claim this, there may be an issue as to whether they will be able to collect, he said.
The Puerto Rico Oversight Board and the local Puerto Rico government may try to take various legal and bureaucratic maneuvers to avoid paying 100 cents on the dollar, Spiotto said. Bondholders may ultimately choose to accept a more modest settlement.
The ERS bond debt has been in default since July 2017.
Also potentially affected are the pensions, for which the system has $31 billion in actuarial liability. In the plan of adjustment the board presented to the Puerto Rico District Court in late September, the board provided that there would be cuts in pension benefits for those with pensions greater than $1200 per month but that these cuts would be no greater than 8.5%.
The government is currently paying nearly $2 billion in the annual budget to fund the retiree pensions. This would be more than necessary to pay the ERS debt service in full. It remains to be seen if payments to the retirees will simply be diverted to the bondholders.
In August 2018 District Court Judge Laura Taylor Swain said that the bondholders didn’t have a perfected lien on government contributions to the system.
In January the First Circuit Court of Appeals agreed that the bondholders initially didn’t have a lien when the bonds were issued in 2008, but said that it was perfected with additional documents in 2015 and 2016.
On Monday the Supreme Court announced it had declined to hear a board appeal of the appeals court decision. That "was to be expected since SCOTUS only sees .08 of cases that are presented for review," said Puerto Rico attorney John Mudd, who represents a municipality in the bankruptcy case. The U.S. was not a party and there was "no conflict between circuits, hence, no need for review," Mudd said.
The board will now have to consider amending its proposed plan of adjustment to accommodate bondholder demands for better payments for the ERS bonds, Spiotto said.
The bondholders in the case, consisting of several hedge and investment funds, could try to resume an earlier effort to get Judge Swain to give them control over the Employees Retirement System.
The board now faces additional potential obstacles for its plan, Spiotto said. Hedge fund Aurelius and Puerto Rico trade union Unión de Trabajadores de la Industria Eléctrica y Riego will argue to the Supreme Court justices next week that the mode that the Puerto Rico Oversight, Management, and Economic Stability Act provided for appointing the board members was unconstitutional. Potentially, the justices could throw out everything that the board has done since its appointment in late summer of 2016.
Bond insurer Assured Guaranty has appealed a first circuit decision that said that bondholders don’t have a lien on the Highways and Transportation Authority revenue so that the bonds need to be paid during the bankruptcy. This could also throw the board’s plans, as found in its HTA fiscal plan, into the air, Spiotto said.
