Puerto Rico bondholders, Oversight Board ask court to reject adjustment stay

Puerto Rico bondholders and the Oversight Board told the court to reject a teachers’ associations’ request for a stay on the Plan of Adjustment enactment, arguing granting it would potentially blow up the commonwealth's exit from bankruptcy.

The board and the PSA Creditors, which includes the biggest holders of Puerto Rico’s central government bonds and four bond insurers, filed their separate oppositions on Wednesday evening.

The board said a stay would inflict serious harm on Puerto Rico by plunging it into “financial chaos,” send the Title III of Puerto Rico Oversight, Management, and Economic Stability Act process “back to square one,” and would “needlessly delay the commonwealth’s economic recovery.”

The board filed its opposition on behalf of Puerto Rico’s central government, Employees Retirement System, and Public Building Authority.

Three teachers’ associations filed notice of their appeal of the plan in the U.S. District Court for Puerto Rico in late January and they quickly followed with a motion to stay the enactment of the plan, which is currently scheduled for March 15. Bankruptcy Judge Laura Taylor Swain said last week she currently plans to rule on the petition for a stay without a hearing and many observers do not expect her to grant the stay.

The PSA Creditors said the law requires a “heavy burden” be met to gain a stay and argue the associations are unlikely to succeed on their appeal’s merits.

The creditors said a stay would harm them because they would not be able to invest the cash that would be distributed to them, noting if the stay were to last six months, they would lose $279 million. A 13-month stay would cost them $700 million and a 20-month stay would cost them $1.118 billion.

The parties said in addition to these losses there would be losses due to professional fees in fighting for the plan in court and losses due to expected increases in interest rates.

The creditors said if the stay extended beyond six months, there would be a possibility the plan would “fall apart.” All parties might have to renegotiate the plan or the court might dismiss the Title III bankruptcy process altogether.

Any stay would jeopardize the many benefits of the plan for Puerto Rico’s government and people, the creditors said.

The PSA Creditors consist of the Ad Hoc Group of General Obligation Bondholders, the Lawful Constitutional Debt Coalition, the Ad Hoc Group of General Obligation Bondholders, the QTCB Noteholder Group, Assured Guaranty, Assured Guaranty Municipal, National Public Finance Guarantee, Financial Guaranty Insurance Company, and Ambac Assurance.

The PSA Creditors said if the teachers’ associations were to be granted a stay, they should be required to post a bond that would cover the costs to the creditors of a 13-month stay, which it said was the median time for an appeal to a circuit court of appeals. They said the bond should be set at $722 million. They said judges in other bankruptcy cases have set bonds greater than $1 billion for stays.

“The purpose of requiring such a bond in a bankruptcy court is to indemnify the party prevailing in the original action against loss caused by an unsuccessful attempt to reverse the holdings of the bankruptcy court,” the creditors said.

The teachers say they would be “irreparably harmed absent a stay” because they say they would lose money. “It is well established, however, that potential for mootness and loss of money alone do not constitute irreparable harm,” the board said.

The teachers’ arguments are “meritless and have already been considered and rejected by this court,” the board said. The teachers have complained the Plan of Adjustment illegally preempts local laws. However, the board said PROMESA allows this.

The teachers said the plan cannot be implemented because it contradicts Act 53, which is the law that provided the local legal underpinning for the plan. That is because Act 53 does not authorize new debt if the defined-benefit plans are frozen, according to the teachers. However, the board said Swain had correctly ruled that Act 53 does not prohibit the freezing of the defined benefits.

The board said any harm to the teachers that could be adequately compensated monetarily cannot be considered irreparable. Thus, the teachers cannot claim irreparable damages could occur without a stay, one of the normal legal conditions for a stay.

A stay would “substantially harm the commonwealth and other interested parties" and, Puerto Rico “would face tremendous uncertainty, instability, and litigation,” the board said.

If Swain were to grant a stay, the board requested she require the teachers’ associations to post a $1.5 billion bond.

Board attorney Martin Bienenstock, partner with Proskauer Rose LLP, was the lead attorney on the board’s opposition submission.