Puerto Rico's bond mediation proceeds at snail's pace

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Six weeks after Puerto Rico’s bankruptcy judge ordered mediation to resolve bondholder disputes over almost $25 billion of island government debt, the mediator has yet to address core legal issues.

A bondholder source familiar with the process said mediators and participants are trying to establish a "base" around which to negotiate. Participants are focusing on how much will be available for debt service from the roughly $15.1 billion in government, pension, and public authorities' bank accounts, the source said. A related focus has been how much flexibility there is in the numbers targeted in the Oversight Board's certified fiscal plan.

These discussions are preceding talks about the legal issues the mediation was announced as being created to address, the bondholder said. When Judge Laura Taylor Swain put a stay of several of the court's adversary proceedings and ordered court administered mediation, she specified the mediators should focus on such topics as whether Puerto Rico general obligation bonds sold after a given date should be considered invalid. The Oversight Board has argued that Puerto Rico’s government was above its debt limit when some bonds were sold.

Barbara Houser, a U.S. Bankruptcy judge, is leading the mediators handling the issues.

The issues affect Puerto Rico’s general obligation, Employees Retirement System, Highways and Transportation Authority, and Public Building Authority bonds. Altogether there were $24.7 billion of these bonds outstanding as of February 2017.

Currently, Swain has set mediation to continue until Nov. 30. The source said Swain may choose to extend the deadline if the mediation is bearing fruit and needs more time.

In Swain’s order for the stay, she said Houser should file a report to the court on Oct. 28 with agreed upon procedural issues and a recommendation as to whether the stay should continue beyond Nov. 30.

To rely just on litigation to resolve the legal issue might mean the case could drag on for five more years, the source said.

The source said one of the goals of the bondholders must be to resolve the matters as quickly as is reasonably possible, so as get bond payments started again. Payments stopped in mid-2016.

Shaun Burgess, portfolio manager at Cumberland Advisors, said the slow progress described by the source was "very reasonable and what I would expect. The mediation process is incredibility important in this case and can avoid a lot of turmoil if a conclusion can be reached.

“Your source is absolutely correct in that the legal questions are so profound that this could drag on for years sans this mediation process,” continued Burgess. “I think establishing a base is a great start but that should only extend to what funds are available rather than what they will pay out.

“Those legal questions are so important because what you can pay out to bondholders is totally dependent on the amount of bonds you have to pay,” Burgess said. “The questions of debt validity are the most profound for both Puerto Rico and the broader municipal market.”

Cumberland owns insured Puerto Rico bonds.

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PROMESA Commonwealth of Puerto Rico Puerto Rico Highway & Transportation Authority Puerto Rico Employees Retirement System Puerto Rico Public Buildings Authority Puerto Rico
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