Puerto Rico mediator’s filing may pressure bondholders to settle

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A Puerto Rico mediator has filed a report that recommends the resumption of litigation over $22 billion of defaulted bonds, a move one expert said may be a way to put pressure on bondholders to settle.

Chief Mediator Barbara Houser filed the report and recommendation just before Thanksgiving urging U.S. District Court Judge Laura Taylor Swain to allow litigation to commence in mid-January.

In late July, Swain put a stay on numerous issues concerning the commonwealth general obligation, Employees Retirement System, Highways and Transportation Authority, and Public Building Authority bonds. She ordered the parties to discuss the issues in confidential mediation.

Swain had hoped that the mediators could come up with a schedule for handling the issues and could find some areas of agreement.

In the filing last week Houser mentioned no areas of agreement but did propose litigation schedules.

The ERS bonds returned to litigation in September and October.

Without the ERS bonds, there are about $22 billion of bonds being addressed by Houser’s recommendation.

Chapman Strategic Advisors Managing Director James Spiotto said restarting the litigation process with specific deadlines would put pressure on the bondholders and others to reach a negotiated solution. Negotiations could go on behind the scenes even as the litigation goes on, he said.

Meanwhile, creditors and the Puerto Rico Oversight Board are negotiating a commonwealth plan of adjustment that may have more creditor support, Houser said. Because of this Houser chose not to file scheduling recommendations for considering the current plan of adjustment. Instead, Houser filed last week’s recommendation to allow litigation on certain debt issues to proceed in the near future.

If a plan of adjustment is confirmed before these other issues are resolved, any appeals of Swain decisions on these issues may be rendered moot, Spiotto said. The plan would address the bond payments and it would be difficult to appeal the confirmed plan.

In the meantime, the U.S. Court of Federal Claims and the U.S. Supreme Court are considering cases that have implications for the outcomes of the disputed issues and bondholder recoveries. Altogether the situation is highly dynamic, Spiotto said.

Among the issues that the mediator was asked to address and is now sending back to litigation are the bonds’ validity and secured status; the treatment of bonds under the U.S. constitution; and whether the elected government’s assent to any agreement is required.

Houser proposed Swain accept three interim case management orders. The first addressed general obligation and Public Building Authority bonds. In the order, concerning attempts by the board or others to dispute bond claims, parties would have until Jan. 8 to file any further disputes of the bonds. Identified parties would have until Feb. 5 to file motions under federal rule of civil procedure 12(b). Other bondholders and interested parties would have until Feb. 19 to do the same. Houser suggests further deadlines.

Regarding efforts to challenge the GO lien, certain interested parties would be given to Feb. 5 to file opening briefs. Other defendants would be given until Feb. 19. Further deadlines are set out.

The second order addressed Highways and Transportation Authority, Infrastructure and Finance Authority, and Convention Center District Authority bonds. It would allow the filing of amendments to a motion for lifts of the stays in the HTA and CCDA cases no later than Jan. 16. It set out further deadlines.

Finally, it would require the board to file complaints against revenue bond claimants no later than Jan. 16.

The third order addressed the bonds of the Government Development Bank Debt Recovery Authority. First, the board and the Puerto Rico Fiscal Agency and Financial Advisory Authority would be given to Feb. 16 to file their position on the standing of the bondholders to file a motion to lift the stay. Houser also proposed further deadlines.

It is now up to Swain to sign, amend, or reject Houser’s proposed orders.

In last week’s filing, Houser said the mediator team will provide a further report on mediation progress on Jan.10.

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PROMESA Commonwealth of Puerto Rico Puerto Rico Public Buildings Authority Puerto Rico Highway & Transportation Authority Puerto Rico Infrastructure Financial Authority Puerto Rico Employees Retirement System Government Development Bank for Puerto Rico Puerto Rico