Judge's ruling slams door on Puerto Rico revenue bondholders

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Puerto Rico bankruptcy Judge Laura Taylor Swain rejected three related claims of bondholder liens on broad categories of commonwealth revenues, likely resulting in nearly $7 billion of outstanding debt paying pennies on the dollar.

This also could result in a knock-on effect for other bond types of Puerto Rican debt.

The judge's decision is also an important one for $6.7 billion in revenue bonds that might be of interest to other non-Puerto Rico revenue bondholders, who may see parallels to their bonds and those ruled on Thursday.

Swain issued her rulings on $6.7 billion of Puerto Rico Highways and Transportation Authority, Infrastructure and Finance Authority, and Convention Center District Authority bonds Thursday morning.

The only hope that remains for the holders and insurers of these revenue bonds now are appeals. Otherwise, they may get very little. The board's approved HTA fiscal plan makes clear very little if anything is expected to go to the HTA bondholders in the next five years. The board's attitude toward the other bonds is less clear but the board has pushed for very steep haircuts on many bond types beyond the GO and sales tax bonds.

Judge Laura Taylor Swain
On Thursday Puerto Rico bankruptcy Judge Laura Taylor Swain rejected bond insurer claims connected to three revenue bond types.

For all three bond types, she said the bondholders and insurers didn’t have a lien or security interest on any money that hadn’t been deposited in the bond payment accounts. Without these liens or security interests, the Puerto Rico Oversight, Management, and Economic Stability Act gave the Oversight Board the right to put the bonds into bankruptcy, put a stay on any bondholder claims against the authorities, and ultimately adjust the bonds.

The Oversight Board issued a statement about the decisions saying they welcomed that "monoline insurance companies failed to show the HTA and PRIFA bonds they guarantee or own are secured by any property interest, such as a security interest, statutory lien, or other equitable interest, in the revenues known as clawback revenues formerly appropriated to HTA and PRIFA to allow them to pay debt service on their bonds. Likewise, the Oversight Board welcomes the Court’s CCDA decision limiting the bondholders’ collateral security to revenues actually deposited into a certain fund, and setting up an evidentiary hearing to resolve a dispute over the identity of the fund."

Responding to the decision, a Puerto Rico attorney outside of these cases said, “Swain has never ruled in favor of bondholders in any important issue.”

A litigant attorney said there would be appeals of the decisions.

Bond insurers Assured Guaranty, Ambac, National Public Finance Guarantee, and Financial Guarantee Insurance Corp. were calling on the court to lift the bankruptcies’ automatic stay provisions on those entities to allow the insurers to sue for what they say is their rights to bond payments. The insurers wrap about $2.95 billion gross par of the HTA bonds and additional amounts of the other two bond types.

With $4.1 billion outstanding, the HTA bonds are the biggest in size of claim.

“The [bond insurers’] HTA Stay Relief Motion is denied to the extent it seeks stay relief or adequate protection with respect to liens or other property interests in revenues other than those that have been deposited in the Resolution Funds,” said Swain, judge for the U.S. District Court for the District of Puerto Rico.

Swain directed the parties to confer and file a joint report by 5 p.m., July 9, concerning any proceedings the parties believe is appropriate concerning the stay relief motion. In particular, Swain mentioned unsecured claims.

In her arguments Swain said the HTA litigants Assured, Ambac, National, and FGIC had failed to show they had a “legitimate lien against” or property interest in the relevant assets.

The insurers had claimed a lien on HTA assets. Swain said the 2018 First Circuit Court of Appeals Peaje Investments decision found the HTA Enabling Act and Excise Tax Statutes didn’t create a statutory lien for the bondholders.

Swain also said the insurers’ claim to have a lien on Commonwealth of Puerto Rico assets was also incorrect. She cited a Puerto Rico law that said the authority’s debt should not be the commonwealth’s debt unless the commonwealth has guaranteed it, something that isn’t the case with the HTA bonds.

Swain rejected the insurers’ claim that they were the owners of the excise tax revenues. While the insurers referred to two First Circuit rulings on Puerto Rico, Swain said the circumstances in this case were different and the cases aren’t relevant.

Finally, Swain rejected the bondholders’ claim to security interests. She said the Oversight Board’s narrower reading of the bond resolutions was consistent with their grammar and the “overall content and expressed purpose of the bond resolutions."

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Puerto Rico Puerto Rico Highway & Transportation Authority Puerto Rico Infrastructure Financial Authority PROMESA