How the Puerto Rico’s Title III bankruptcy case judge handles the commonwealth’s highways bonds may threaten revenue bond bankruptcy precedent, according to one prominent municipal analyst.

On Monday judge Laura Taylor Swain heard arguments from a lawyer for a hedge fund holding Puerto Rico Highways and Transportation Authority Bonds, who said the judge was bound to follow Chapter 9 bankruptcy provisions requiring the observation of special revenue liens during bankruptcy.

Puerto Rico Title III bankruptcy Judge Laura Swain introduced Chief Mediator Barbara Houser on Wednesday.
Puerto Rico Title III bankruptcy Judge Laura Swain introduced Chief Mediator Barbara Houser on Wednesday. U.S. Courts

According to the El Nuevo Día news website, lawyer G. Eric Brunstad, representing Peaje Investments, said on Monday that the Puerto Rico Oversight, Management, and Economic Stability Act called for the following of Chapter 9 in this matter. The hearing was part of the Title III bankruptcy case that PROMESA authorized.

The authority has submitted a fiscal plan in which the tolls, gasoline charges, and other revenues that had been pledged to pay the bonds would instead be used for general authority expenses through at least fiscal year 2026. The plan indicated that the authority would have no money to pay any debt service during that period.

The HTA bonds are currently being paid out of their debt service reserve. According to the authority’s fiscal plan the reserve will run out and the authority won’t be able to pay bonds due in July.

In Monday’s Municipal Market Advisors Outlook, MMA partner Matt Fabian wrote: “Looming payment defaults for [Puerto Rico] special revenue bondholders are troubling.” Fabian specifically mentioned Puerto Rico’s senior highway revenue bonds, which “have a direct analog in the hundreds of billions of dollars of mainland revenue bond issuers in every state.

"If upheld by the court, the diversion of revenues away from holders could build on the still-underappreciated damage done to revenue holders via the Detroit Water and Sewerage Department debt exchanges, softening investor enthusiasm for revenue bonds generally and the bid side for weaker revenue backed projects specifically.”

The authority has $4.1 billion in bonds outstanding.

According to Reuters and El Nuevo Día, Swain expressed skepticism that Peaje was about to experience “irreparable damage” as Brunstad had claimed. Brunstad agreed to drop his demand for a temporary restraining order in exchange for an expeditious hearing on his complaint.

Swain said Peaje’s concerns would be taken up at an Aug. 8 hearing in San Juan.

In an adversary complaint that bond insures filed in the Title III case on Saturday, several bond insurers made the same argument as Brunstad made. They say that section 301 of PROMESA must follow sections 922 and 928 of the title 11 of the United States Code, which they say protect the payment of revenue bonds with liens during bankruptcies.

On Tuesday Puerto Rico’s Fiscal Agency and Financial Advisory Authority filed a motion in the Title III case that, if the judge agreed to it, would prohibit utilities from halting service and would set up a procedure to assure adequate payment. A hearing is set on the matter on June 28.

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