Puerto Rico investors move to defend legality of bonds

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Puerto Rico Public Building Authority bond holders filed a motion in Title III bankruptcy court to defend their claim on PBA rental revenue, a move that may thwart an effort by the Oversight Board to nullify $6 billion of the territory's general obligation bonds.

The Oversight Board is arguing that both the GOs and the $4 billion of PBA bonds are invalid because public sector entities' leases of PBA property are actually "disguised financing transactions" by the government. If those disguised transactions were properly included in Puerto Rico's total debt, according to the Oversight Board, the 2012 and 2014 issuances of GOs exceeded the territory's constitutional debt limit and therefore were illegal.

On Dec. 21, 2018 the board filed an adversary proceeding in the central government’s Title III bankruptcy, seeking to invalidate the Puerto Rico government rent payments to the authority, which are used in part for payment of PBA’s bonds. While the board didn’t explicitly call for the end to the PBA bond payments, its motion would cut the source for their payment. And the board reserved the right to call for a stop to payments later.

In the bondholders’ filing on Thursday, they point to various indicators that the leases supporting the bonds were true leases: at the end of the leases ownership didn’t change; the PBA has been and remains autonomous from Puerto Rico’s government; and the rental payments covered more than just the bonds but also maintenance.

“The premise of plaintiffs’ argument that the PBA is a sham and mere alter ego of the Commonwealth [of Puerto Rico] has been expressly rejected no fewer than five times, including by the Puerto Rico Supreme Court and the U.S. Court of Appeals for the First Circuit,” the bondholders argued.

Thursday's motion was filed by PBA Funds, Assured Guaranty Corp., Assured Guaranty Municipal Corp, and the QTCB Noteholder Group, which consists of three entities or advising groups that hold PBA bonds.

They ask the judge to dismiss the board’s first two causes of action: one that sought to end Puerto Rico’s responsibility for paying rent to the PBA and another that would declare that PBA wasn’t entitled to administrative expense claims. They don’t address the board’s third cause of action. However, this cause of action is duplicative of the first and second and if the judge throws out the first two, the third may also go, said James Spiotto, managing director at Chapman Strategic Advisors.

In January, the board filed a motion in Puerto Rico’s Title III bankruptcy that the PBA was a sham because it was really part of Puerto Rico’s governments and its leases were in fact disguised debt financing for Puerto Rico. Therefore, the board said the PBA bonds should be considered part of Puerto Rico’s debt. Because of this Puerto Rico’s 2012 and 2014 GO bonds should be considered as going above the commonwealth’s constitutional debt limits and thus should be considered null. The board said Puerto Rico shouldn’t pay these GOs.

If the judge in this adversary proceeding agrees with the PBA bondholders that the leases are true leases, it would make the board’s efforts to vacate the 2012 and 2014 GOs difficult, Spiotto said.

A source close to the case said, “A ruling that the PBA’s leases are valid would be fatal to the debt limit objection to the 2012 and 2014 GO bonds, because it would gut the core premise of that objection (that the PBA is supposedly a ‘sham’).”

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PROMESA Puerto Rico Public Buildings Authority Commonwealth of Puerto Rico Puerto Rico