Puerto Rico’s bondholders and bond insurers made court filings Monday to protect their interests as the historic municipal debt restructuring proceeds.

In a 30 page filing in the court-supervised restructuring of general obligation and Puerto Rico Sales Tax Financing Corp. (COFINA) bonds, the bondholders and insurers argued that the judge has the right to increase the amount to be paid to bondholders from the total allotted in a fiscal plan certified by the federally appointed Oversight Board.

The court case under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act reconvenes Wednesday at U.S. District Court in San Juan. The court currently is considering $30.9 billion of debt and may be expanded to include more.

National Public Finance Guarantee chief executive officer Bill Fallon said he was disappointed with the Puerto Rico Oversight Board.
National Public Finance Guarantee chief executive officer Bill Fallon said he was disappointed with the Puerto Rico Oversight Board.

In mid-March the board enacted the fiscal plan to govern Puerto Rico through fiscal year 2026. Following the provisions of PROMESA, the plan specified, among other things, the amount of debt service that the commonwealth was to pay in the next 9.25 years.

In a filing in the Title III case on June 15, the board argued that the federal judge didn’t have the right to review the plan's to limit payment to 24% of scheduled debt service. PROMESA section 106(e) says, “There shall be no jurisdiction in any United States district court to review challenges to the Oversight Board’s certification determinations under this act.”

In response, the creditors said Monday, “Even if the board were correct that the statutory requirements for certifying a fiscal plan are not subject to judicial review – a position that the responding creditors do not concede – it would not follow that the board’s proposed debt-service amounts are shielded from transparency to creditors and judicial scrutiny.”

Instead, they write, “in order for any plan of adjustment premised on the fiscal plan to be confirmed under Title III of PROMESA, the board must demonstrate that it satisfies a number of separate confirmation requirements drawn from the Bankruptcy Code (but in certain key respects more protective of creditors than the analogous provisions).” Creditors say they also have the right to challenge the assumptions underlying the board’s proposed debt-service amounts.

“Nothing in PROMESA overrides the requirement that the commonwealth do all that is reasonably possible to maximize creditor recoveries if any proposed plan of adjustment is to be confirmed,” the creditors said on Monday.

Monday’s response to the board was filed by the Ad Hoc Group of General Obligation Bondholders, Ambac Assurance, Assured Guaranty Corp., Assured Guaranty Municipal Corp., The Mutual Fund Group, National Public Finance Guarantee Corp., and The Puerto Rico Funds.

The creditors’ argument is likely to be a “very important” element of their efforts in the Title III case, attorney John Mudd said. However, he also said that some creditors were trying to show that the fiscal plan was contrary to the U.S. Constitution. Others plan to try to dismiss the Title III case and restore litigation under prior laws 120 days after the start the Title III case, he said.

Chapman Strategic Advisors managing director James Spiotto said the creditors were right in asking for transparency. If a reasonable deal can be negotiated that would allow better payments to the creditors, then it should be added to the fiscal plan, he said.

In the second biggest Puerto Rico debt restructuring, bond insurers Assured Guaranty and NPFG filed a lawsuit against the Oversight Board to get a court order forcing it to certify a previously negotiated restructuring deal with the Puerto Rico Electric Power Authority.

For nearly three years the authority, its creditors and Puerto Rico’s government have been working on the deal, called the Restructuring Support Agreement. It was amended and restated in early April and was submitted in late April to the board for approval under Title PROMESA’s Title VI, which governs consensual deals.

When Congress passed PROMESA, NPFG argued, the U.S. Congress “singled out the RSA for expedited approval, eliminating the need for substantive review and providing that the Oversight Board only need to certify that the proposed debt modification is consistent with the preexisting RSA [that prevailed when PROMESA was passed].” So far, the board has failed its legal obligation to approve the agreement, NPFG said.

“After three years of good-faith negotiating and broad consensus among PREPA and its creditors, we are disappointed to see the Oversight Board refuse to comply with the law and instead attempt a last-minute renegotiation before the RSA expires,” said NPFG CEO Bill Paxton.

Under the RSA the insurers have promised to make a bridge loan to PREPA before July 1 so that the authority can make a bond payment on July 3. If the board doesn’t certify the RSA before July 1, the agreement may be in jeopardy and the authority may default on the July 3 payment.

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