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Wednesday, Dec 20, 2017

Seema Balwada, CFA

Judge Swain Orders Puerto Rico To Continue To Make Interest Payments On Pension Bonds…

Today’s Court order should make Puerto Rico bondholders more optimistic that Judge Swain intends to enforce “lawful liens” on bonds backed by a dedicated revenue stream.

Puerto Rico must keep paying pension bondholders while the judge overseeing the Island’s bankruptcy contemplates a final ruling on whether bondholders have a right to 9.27% on retirement contributions made to government workers. Puerto Rico, which has about $3 billion of pension bonds outstanding, owes about $13.9 million each month in interest to holders of the debt. It is one of the few Commonwealth securities that are still paying interest to bondholders.

Pension bondholder lawyers claim bondholders are entitled to adequate protection payments because they have a mandatory lien of 9.27% on any contributions made by government agencies to their worker’s retirement system. The Commonwealth disputes the bondholder claim. Disregarding the lien Puerto Rico is saying pension bondholders are trying to seize money that should go to retirees.

While U.S. District Court Judge Swain decides what legal rights bondholders have to past and future retirement contributions, the government must keep paying the bondholders. The amount of the regular payments will be based on interest due the bondholders, she said.

Other creditors, like general obligation bondholders, are not receiving any payments because they don’t have the same kind of lien, or collateral, claims. COFINA bondholders, who believe their debt is backed by a “perfected statutory lien” on sales tax revenue, are not getting paid while a dispute about their rights winds its way through court. Bank of New York Mellon holds over $900 million in the COFINA bond debt service account awaiting a court ruling.

Pension bondholders and the retirement system for government employees began fighting in court before the Commonwealth filed for bankruptcy in May. After the filing, the Commonwealth and bondholders worked out a temporary deal allowing bondholders to collect payments until at least October 31, while they waited for the judge to make a final ruling on the collateral dispute. When Hurricane Maria struck in September, the resolution of that dispute was delayed until today. 

Swain has not said when she will rule on the collateral fight. The judge has been promoting negotiations and consensual settlements and may be encouraging the two sides to reach an agreement. Should bondholders win, they would have the right to be paid from retirement contributions made by the various Puerto Rico government agencies on behalf of employees. If they lose, which now seems less likely, the bondholders would become unsecured creditors and likely see recoveries fall.

No one knows how Judge Swain will eventually rule and what liens the Court will deem lawful. However, today’s ruling should make Puerto Rico bondholders more optimistic that “statutory liens” will be respected.

If you have any questions or desire updated information contact your GMS Account Executive. Information taken from sources deemed reliable. This update does not purport to include all available information

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