Puerto Rico Rul­ing May Have Wide Ram­i­fi­ca­tions

The Bond Buyer - - Front Page - BY ROBERT SLAVIN

A bank­ruptcy judge’s rul­ing con­cern­ing the Puerto Rico High­ways and Trans­porta­tion Author­ity has ram­i­fi­ca­tions for bonds far be­yond those of the author­ity, an­a­lysts say.

Ti­tle III bank­ruptcy Judge Laura Tay­lor Swain is­sued her rul­ing Fri­day in the Ti­tle III case and in a re­lated ad­ver­sary pro­ceed­ings filed by Peaje In­vest­ments LLC. She de­nied Peaje’s mo­tion for a pre­lim­i­nary in­junc­tion and for re­lief from the Puerto Rico Over­sight, Man­age­ment and Eco­nomic Sta­bil­ity Act’s stay on debt lit­i­ga­tion.

Swain’s rul­ing shows that bond in­vestors should, among other things, pay close at­ten­tion to the ex­act le­gal lan­guage pro­tect­ing their in­vest­ments, Mu­nic­i­pal Mar-

ket An­a­lyt­ics said in its weekly Out­look.

“Without a doubt … this is a vic­tory for the [Over­sight] Board’s con­tin­u­ous ef­fort to de­stroy all bond­holder liens in Puerto Rico,” Puerto Rico at­tor­ney John Mudd wrote in his weekly email on the Ti­tle III case. Mudd has rep­re­sented one of Puerto Rico’s mu­nic­i­pal­i­ties in the pro­ceed­ing.

At is­sue in the case are the toll rev­enues that the author­ity col­lects. Peaje, which owns $65 mil­lion of the bonds, claimed that it had “lien rights” un­der the author­ity’s En­abling Act and the 1968 Res­o­lu­tion that set terms for the is­sue.

The High­ways and Trans­porta­tion Author­ity has been in pay­ment de­fault since early July 2016, ac­cord­ing to Moody’s In­vestors Ser­vice.

Swain said that Bank­ruptcy Code sec­tion 922(d) al­lows an ex­cep­tion to PROMESA’s stay on debt lit­i­ga­tion if pledged spe­cial rev­enues sub­ject to a lien were present. Though Swain ac­knowl­edged that there were pledged spe­cial rev­enues, she said there was no “statu­tory lien” in the act or the 1968 res­o­lu­tion.

Swain said that was the only type of lien she would rule on, be­cause other types weren’t pre­sented in the mo­tion. Mudd said it was stan­dard pro­ce­dure to ad­dress only the ar­gu­ment that the lit­i­gant made. If Peaje had claimed a dif­fer­ent type of lien, an “agree­ment lien,” Mudd said the judge prob­a­bly would have ruled against that, too.

Swain said the En­abling Act only said that the author­ity’s res­o­lu­tions could in­clude liens – not that the act it­self was cre­at­ing liens. She said the 1968 res­o­lu­tion was cre­ated by the author­ity it­self. Ac­cord­ing to her, “statu­tory liens” can only be cre­ated through leg­is­la­tion.

Swain said bond­hold­ers wouldn’t ex­pe­ri­ence “ir­repara­ble harm” from a con­tin­u­a­tion of the non-pay­ment of their bonds. The toll rev­enues were be­ing used to main­tain the roads, she said, and those prop­erly-main­tained roads were ul­ti­mately nec­es­sary for toll rev­enues to ex­ist. She ques­tioned the ad­e­quacy of tes­ti­mony pro­vided by Peaje’s ex­perts.

Peaje wanted the judge to is­sue a pre­lim­i­nary in­junc­tion telling the author­ity to re­sume de­posit­ing toll rev­enues with the bond trustee or, al­ter­nately, re­move the stay on debt-re­lated law­suits against the author­ity.

In MMA’s Out­look pub­li­ca­tion, man­ag­ing di­rec­tor Lisa Wash­burn and part­ner Matt Fabian said Swain’s rul­ing “high­lights in­dus­try-wide prob­lems of: 1) in­con­sis­tent con­struc­tion of state statutes that os­ten­si­bly pro­vide bond­holder se­cu­rity like statu­tory liens; 2) wide­spread in­vestor ac­cep­tance of per­ceived le­gal pro­tec­tions re­gard­less of the qual­ity of the spe­cific lan­guage re­lied upon, par­tic­u­larly when credit spreads are tight and sup­ply scarce.”

“Puerto Rico in­vestors are be­ing con­tin­u­ally pre­sented with (at least tem­po­rar­ily en­forced) lim­i­ta­tions on se­cu­rity pro­tec­tions that they had be­lieved were much stronger,” Wash­burn and Fabian wrote. “Th­ese lim­i­ta­tions spring from poor draft­ing (in the case of HTA), sus­pended dis­be­lief (COFINA), and a po­lit­i­cal/ju­di­cial pivot to­wards em­pa­thy for the debtor re­gard­less of all else (GO).”

While the first two are “con­trol­lable risks” the third one has be­come un­avoid­able in the mu­nic­i­pal mar­ket, they wrote. ◽

Matt Fabian of Mu­nic­i­pal Mar­ket An­a­lyt­ics says the judge’s rul­ing in the High­way Author­ity case “high­lights in­dus­try-wide prob­lems.”

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