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Muni Week Review / Preview 7/31/2017

Monday, Jul 31, 2017

PUERTO RICO UPDATE

Secured Bondholders Assert Contract & Property Rights… Bond Insurers Seek “Special Revenue” Federal Bankruptcy Code Protection for Dedicated Revenue Liens… Ad Hoc GO Group Demand Spot on Unsecured Creditors Cmte… PREPA Bond Trustee Joins Insurers’ Demand For Receivership… Anticipate COFINA August 1 Payment  To Be Continued To Be Held In Escrow…


Secured 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 U.S. 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), which applies to the States and Commonwealth (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 legislation effectively 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 Clause. Because Employee Retirement System bonds were over-secured at all times, the amount of just compensation for the taking of bondholders’ 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, as 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.

Bond Insurers Seek “Special Revenue” Federal Bankruptcy Code Protection for Dedicated Revenue Liens… Special revenue provisions of the Federal Bankruptcy Code preempt the Commonwealth from enacting the illegal Fiscal Plan and Fiscal Plan Act. Congress retained the special revenue provisions of the Federal Bankruptcy Code in PROMESA. Accordingly, liens on special revenue remain enforceable against revenues received after the filing of a Title III. The Commonwealth’s illegal actions cannot override statutory and contractual liens on dedicated pledged “special revenues”. Bond insurers Assured Guaranty, National Public Finance Guarantee and FGIC asked the Court to enforce special revenue protections of the Bankruptcy Code which Congress incorporated into Title III under PROMESA. Bond insurers complained that Puerto Rico Government’s ongoing diversion of special revenues dedicated to highway bonds triggered defaults in July. The Commonwealth barred the bond Trustee from using available reserve funds, the property of highway bondholders, for a bond payment due July 3. The Commonwealth’s actions impair bondholders’ contractual rights and are an unconstitutional taking of bondholders’ property without just compensation or due process of law. Termed unconstitutional by bond insurers, The Fiscal Plan Act enacted April 29, 2017 purportedly authorizes the Puerto Rico Government to misappropriate secured bondholder collateral and trust funds for its own use. The illegal Fiscal Plan authorized by the Federal Board in March 2017 disregards constitutional and statutory priorities granted to bondholders and subordinates debt payments to all expenses. Puerto Rico administration, aided and abetted by the Congress appointed Federal Board disregards the corporate separateness of Puerto Rico public corporations and undermines Title III of PROMESA which does not permit substantive consolidation of affiliated debtors. The Federal Oversight Board’s actions impair bondholders’ contractual rights and are an unconstitutional taking of bondholders’ property without just compensation or due process of law. To narrow down on lien issues raised by Highway and Transportation Authority bondholders, Judge Swain denied GO Group and AMBAC from intervening in discovery related to litigation brought by Puerto Rico Highway bondholders. Bond insurers claim that federal statutory protections ensure that post-petition special revenues remain subject to a contractual lien to guarantee that secured revenue bondholders’ lien is protected.

PREPA Bond Trustee Joins Insurers’ Demand For Receivership… PREPA Bond Trustee U.S. Bank National Association filed with the Court its support for receivership sought by bond insurers National Public Finance Guarantee, Assured Guaranty, Syncora Guaranty and the Ad Hoc Group of PREPA bondholders. The Trustee and bondholders holding specified percentages of bonds are granted interrelated enforcement rights pursuant to the Trust Agreement and are entitled to direct remedial proceedings triggered by PREPA failure to pay debt service due July 3. On July 19, bond insurers and Ad Hoc Group of PREPA bondholders, collectively holding/insuring 65% of PREPA Bonds sought the court to appoint a receiver. If the Court grants the bond insurers’ request, the Trustee would have ongoing duties under the Trust Agreement related to the receivership proceedings. The judge will address the bondholders request for a PREPA receiver at the August 9 hearing.

Ad Hoc GO Group Denied a Spot on Unsecured Creditors Cmte… Commonwealth of Puerto Rico's Ad Hoc Group of general obligation bondholders (GO Group) filed with the U.S. Bankruptcy Court a motion to reconstitute the official committee of unsecured creditors. The motion which was denied explains, “The GO Group seeks to rectify an obvious and unprecedented anomaly. The Oversight Board and Commonwealth assert that Constitutional Debtholders are the largest class of unsecured creditors in these Title III Cases. The Committee concedes that although Constitutional Debtholders are a “very important Group to which the Committee owes fiduciary duties, they remain “unrepresented”. The United States Trustee has nonetheless refused to appoint a single Constitutional Debtholder to the Committee, despite several holders, including two members of the GO Group, being willing to serve. 

Anticipate COFINA Aug. 1 Payment To Be Continued To Be Held In Escrow… It is anticipated the August 1 debt service due COFINA Sales Tax bondholders will not be made. Based on current information the pledged COFINA revenue continues to flow to the trustee for next year’s debt service. To date the Commonwealth has not attempted to claim COFINA revenue, the revenue continues to flow as dedicated by the legal structure. COFINA bondholders must continue to wait until August 9 for Federal Judge Laura Swain to hopefully uphold their rights and authorize payment of the trustee held money to COFINA bondholders. All parties involved including the judge expect the COFINA dispute to be resolved not later than December.

If you have any questions or desire updated information contact your GMS Account Executive.

Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.