Puerto Rico ERS bonds emerge from mediation as UBS battles for delay
Financial firm UBS is working to gain greater input in the battle over Puerto Rico’s $3.2 billion of Employee Retirement System bonds, a dispute that since late September has been emerging from a confidential mediation process into open court.
On Tuesday UBS Financial Services Inc. filed an objection to a proposed schedule to deal with the legal arguments over the ERS bonds. The Unsecured Creditors Committee, the Puerto Rico Retirees Committee, the Puerto Rico Oversight Board, fiscal agent Bank of New York Mellon, two groups of hedge and investment funds that hold the ERS bonds, and Puerto Rico’s Fiscal Agency and Financial Advisory Authority proposed the schedule on Oct. 18.
Under the schedule, bondholder parties would file petitions on Friday. In its objection UBS said that it was facing two suits connected with its underwriting of the ERS bonds. The system has sued it for more than $800 million. The Oversight Board has also sued UBS along with other firms that underwrote Puerto Rico bonds.
The suits are part of the continuing struggle in Puerto Rico’s bankruptcy over payment on about $72 billion in debt.
The outcome of the ERS bond disputes may have an impact on how other bonds will be treated. The board’s central government plan of adjustment currently awards the ERS bonds 13 cents on the dollar. The same plan has alternate assumptions for the payment of about $33 billion more of commonwealth and Public Building Authority bonds. If courts rule in ERS bondholders' favor and the bondholders manage to force higher recoveries on the bonds, there might be less money available for other bonds.
Under the proposed schedule, parties plan to litigate the bonds’ legality and the scope of bondholders’ lien on the system. They are not dealing with a challenge to whether a lien continued after the putting of ERS into Title III bankruptcy, an issue that was appealed to the U.S. Court of Appeals.
“As currently drafted, the scheduling motion contemplates that the [challenge to the bonds’ legality] will be addressed through the ERS Bond Objections Procedures without meaningful participation by UBS Financial” the firm said in its Objection Tuesday. UBS complained that the current scheduling motion would allow UBS as a “participant” to only file a “joinder” in April or May. Friday’s proposed scheduling motion specifies that the bondholders would submit their central arguments and counterclaims on Friday.
“UBS Financial believes it will be efficient for all interested parties, including UBS Financial, to litigate the [bonds’ legality issue] in a coordinated manner,” UBS said in its Tuesday objection. “But that means that UBS Financial must also be given an opportunity to fully and fairly participate in the litigation on this key issue.”
In late July Title III bankruptcy Judge Laura Taylor Swain put a stay on litigation on a wide array of issues involving several types of Puerto Rico bonds, including the ERS bonds. On Sept. 26 Luc Despins, an attorney at Paul Hastings who represents the Unsecured Creditors Committee, filed a supplement on procedures saying that the committee had been meeting with the Retirees Committee, FAFAA, the board, BNY Mellon, and ERS bondholders and that the parties had agreed that it would be better to move the contested matters from mediation to open litigation.
Despins said the proposed litigation procedures would provide benefits to the estates of the Puerto Rico bond issuers and the Title III cases. “Resolution of the Claim Objections is critical to the debtors’ ability to move forward with an effective plan process,” he said.
On Oct. 7 Swain agreed to shift the two ERS controversies into open litigation. Parties of interest, including ERS bondholders, were given until Nov. 18 to file a notice of participation.
On Oct. 8 UBS filed a motion with the Title III court to lift a stay in the ERS bankruptcy and allow it to file a counterclaim against the system. The system has been pursuing a case unimpeded against UBS in a local Puerto Rico court, yet the Title III stay in the ERS case in federal court has prevented UBS from filing a counterclaim against the system. UBS said this was unfair and asked the judge to act.
In the proposed schedule, all the filings would be completed by May 20. According to the document, if Swain doesn’t approve the schedule by Friday, the bondholders would submit their arguments and counterclaims when she approved it.
The parties asked the judge to grant the motion within seven days without a hearing, as there was a “widespread consensus” in support of the motion.
On Tuesday UBS filed its objection. It said that since Monday lawyers for UBS and the board had met to discuss several topics including the scheduling. UBS asked Swain to deny Friday’s proposed scheduling motion and schedule a hearing on UBS’s objection for Dec. 11.