Puerto Rico bondholders' slog through the courts worsens

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Puerto Rico bondholders' legal struggles mounted this week as the restructured COFINA bonds faced at least two new court challenges and the U.S. Supreme Court declined to hear investors' appeal in the Highway and Transportation Authority bankruptcy.

On Monday and Tuesday, litigants in the Puerto Rico Sales Tax Financing Corp. case filed notices of appeal to the COFINA deal to the U.S. Court of Appeals for the First Circuit. They filed the notices in the U.S. District Court for Puerto Rico.

Title III bankruptcy judge Laura Taylor Swain, who operates out of the district court, approved the plan of adjustment affecting $17.6 billion in debt on Feb. 4. At least some of the bonds started trading on Feb. 15 in the secondary market.

One of the two groups of litigants consists of three holders of COFINA subordinate bonds. Peter Hein and Lawrence Dvores are representing themselves (Hein is an attorney by profession). The third, Mark Elliot, is represented in the planned suit by Rafael González Valiente, an attorney with Godreau & Gonzalez Law, LLC.
The other group consists of Puerto Rico Rep. Manuel Natal Albelo, René Pinto Lugo, the VAMOS activist group, and seven Puerto Rico trade unions. San Juan attorney Roberto Maldonado Nieves is representing this group.

Neither of the notices gave any indication of the appeals’ arguments. "We will be seeking dismissal of the appeal as equitably moot," said a spokesman for the Ad Hoc Group of COFINA Senior Bondholders.

On Feb. 5 municipal bankruptcy expert James Spiotto said that if there is no stay and the deal got carried out, an appellant would have a hard time undoing it. Courts will see it as a done deal. Spiotto is managing director at Chapman Strategic Advisors.

The COFINA deal is the first class of Puerto Rico public sector debt to have a restructuring completed under the Title III section of the Puerto Rico Oversight, Management, and Economic Stability Act.

On Tuesday the U.S. Supreme Court rejected hearing an appeal claiming that a holder of Puerto Rico Highways and Transportation Authority had a statutory lien on a revenue stream supporting the bonds. Peaje Investments has claimed that the lien means the bonds should be paid in the midst of the PRHTA bankruptcy.

Swain ruled there was no statutory lien in August 2017. The First Circuit judges agreed in August 2018. On Tuesday the Supreme Court said it wouldn’t review the circuit court’s decision.

In the circuit court’s August ruling it also said that Swain was wrong when she said that the Puerto Rico Oversight Board had established adequate protection for the bondholders. The circuit court judges directed Swain to look more closely at the issue. Swain hasn’t issued a ruling on the issue since then.

The board released a statement: “The Financial Oversight and Management Board for Puerto Rico welcomes the decision by the U.S. Supreme Court to deny a petition to review a U.S. Court of Appeals ruling regarding the toll revenues of the Puerto Rico Highways and Transportation Authority.”

The board said the decisions by the district, circuit, and supreme courts “help to advance the Oversight Board’s work toward restructuring HTA’s debt.”

Attorneys for Peaje didn’t immediately return calls for this story.
As of January 2017 the Highways and Transportation Authority had $4.1 billion in debt outstanding.

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PROMESA Puerto Rico Sales Tax Financing Corp (COFINA) Commonwealth of Puerto Rico Puerto Rico