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PUERTO RICO BONDS UPDATE

Friday, Oct 06, 2017

Seema Balwada, CFA / October 6,2017

Puerto Rico Pension Bondholders sue for “Just Compensation” Assert Constitutional Contract And Property Rights Have Been Violated…

On July 19, 2017 Holders of Puerto Rico Employment Retire System (ERS) Pension bonds filed what may be the first of many lawsuits against The United States Of America. The suit centers on a claim for “Just Compensation” based on the argument that President Obama appointed the Federal Financial Control Board to Oversee Puerto Rico Finances making it a Federal Entity. As a Federal Entity the U.S. Government is responsible and liable for the Board’s Actions.

Summary of Secured Pension Bondholders Litigation Against The United States Of America

Secured Pension Bondholders Assert Contract & Property Rights… Neither PROMESA nor any other Federal Law authorizes or allows the Commonwealth or the Court to impair contracts. Therefore, neither the US. Constitution nor The Puerto Rico Constitution Takings Clause can be violated by a PROMESA plan of adjustment. Even Puerto Rico’s Constitution does not allow it to divert pledged property subject to a lien granted to bondholders to the Commonwealth General Fund. The U.S. Takings Clause, U.S. Constitution, Fifth Amendment, applies to the States and the Commonwealth. The U.S. Constitution Fourteenth Amendment, provides that “private property shall not be taken for public use, without just compensation.” On July 19, bondholders commenced legal action in the Court of Federal Claims against the United States of America because the Federal Board approved legislation that confiscates bondholders’ constitutionally protected pledged property. Bondholders allege that recent Puerto Rico legislation effectively allowed taking property from secured creditors in order to give it to unsecured creditors is not a “public use” within the meaning of the U.S. and Puerto Rico Takings Claus. Because Employee Retirement System bonds were over-secured at all times, the amount of just compensation for the taking of bondholder’s collateral would be the full debt service or 100% recovery for holders of secured ERS bonds. The ERS bond Resolution created a contractual relationship between ERS and bondholders, giving bondholders a contractual right to full and timely debt service. Recent Puerto Rico legislation substantially impairs contractual obligations of ERS by depriving ERS of the funds necessary to pay debt service. The Puerto Rico Constitution provides that “no laws impairing the obligation of contracts shall be enacted”. The same is echoed in the U.S. Constitution. ERS underfunding problem was both foreseeable and avoidable. It was caused by chronic underfunding of the ERS, its enactment of   politically opportunistic benefit increases without allocating funds to pay for them and its repeated failure to address pension challenges. ERS bondholders assert full ownership rights on a constitutionally protected property interest in the form of valid, perfected security interest in and liens on pledged property. COFINA bondholders also allege they have a strong statutory protected lien on dedicated revenue which they believe is their property.

Bondholders Claim The United States Is Accountable For Puerto Rico Federal Oversight Board Actions…  Bondholders claim Puerto Rico’s Federal Oversight Board approved legislation on June 30, 2017 that violated the Takings Clause of the Fifth Amendment to the United States Constitution. Since the U.S. Government created the Board and controls the Board it is responsible for the Board’s actions. On July 19 Employee Retirement Systems (ERS) Secured Creditors commenced an action in the Court of Federal Claims against the United States of America to obtain just compensation for the taking of property affected by newly created Puerto Rico legislation which confiscates bondholders’ constitutionally protected property interests in Pledged Property. The new law bypasses the ERS bond resolution and requires employers to make increased employer contributions to the Commonwealth General Fund instead of bondholders. The new law orders the ERS to sell its assets and to transfer the net cash proceeds into the Puerto Rico Treasury Secretary’s account as part of the General Fund for fiscal year 2017 – 2018 to make payments to pensioners. The ERS bonds are secured by collateral that includes all employer contributions from Puerto Rico Government employers. ERS bondholders claim if the new law is allowed, Congress authorized Puerto Rico to seize cash that belonged to bondholders, violating the U.S. Constitution. Bondholders claim “constitutionally-protected property interest in the form of valid and enforceable liens on Pledged Property” entitles them to just compensation. The Oversight Board working with the Commonwealth designed the new law and directed the Commonwealth to enact it and adopted it on behalf of the Governor. Bondholders allege, the Board is a Federal entity for constitutional purposes pursuant to the analysis of the United States Supreme Court. The foundation of the original ERS bond transaction was an extensive security package necessary to protect holders of ERS bonds. ERS Collateral pledged to support the ERS bonds was sufficient to service the interest on the bonds for the life of the bond issue and to repay the principal of the bonds in full at maturity. Without this security package it would have been impossible for the ERS to sell the bonds in the first place. The Oversight Board is clearly part of the U.S. Federal Government, therefore, its actions are the actions of the United States Government. Thus, when the Oversight Board takes actions to confiscate private property such as the multi-billion dollar collateral package securing the ERS bonds it is an unlawful, compensable taking by the United States Government. The bondholder claim is founded on the Fifth Amendment to the United States Constitution, which provides in pertinent part that “private property shall not be taken for public use, without just compensation.” The action seeks to bring the Federal Board’s alleged violation of the U.S. Constitution under the spotlight of the United States Supreme Court. 

Temporary Stipulation and Recent Event Update… On July 17, 2017 Judge Swain, who oversees the Puerto Rico debt restructuring, approved a stipulation agreed upon by the Puerto Rico Government and the Employee Retirement System (ERS) Bondholders. The Bondholders were paid the missed July 1, 2017 interest payment and will continue to be paid interest until Judge Swain rules on October 31, 2017. On October 4, 2017 Judge Swain granted an extension on the hearing to rule until November 30, 2017

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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