The U.S. Court of Appeals for the First Circuit said that Puerto Rico pension bondholders have no collateral rights over money collected by the U.S. territory’s public retirement system after it filed for bankruptcy in 2017, WSJ Pro Bankruptcy reported. The court said that income received by the pension fund after it entered bankruptcy proceedings aren’t payable to creditors who bought $3 billion in pension obligation bonds. Lawyers for the bondholders didn’t respond to a request for comment. Puerto Rico’s financial oversight board has proposed paying back those bonds at 13 cents on the dollar as part of a broad financial restructuring. A decade ago, with its assets dwindling and the government skipping contributions, Puerto Rico’s Employees Retirement System, or ERS, sold the pension debt to keep itself afloat and buy time for its investment portfolio to grow. Proceeds from the bond issuance were supposed to ensure benefits would be paid until elderly pensioners died off and younger employees began retiring with leaner benefit packages. Bondholders were assured they would be repaid ahead of retirees, while contributions from public agencies were pledged as collateral. Instead of paring down the pension funding gap, the debt sale further indebted ERS when returns on its investment failed to keep pace with the interest on the bonds. ERS had virtually no assets to its name when Congress passed a rescue law, known as Promesa, in 2016 to help Puerto Rico reorder its debts. After Promesa was enacted, the employer contributions that supported the bonds were moved out of creditors’ grasp. With few assets left in the pension fund, municipalities and public agencies began paying benefits on a pay-as-you-go basis to the tune of hundreds of millions of dollars. Read more.
In related news, the majority New Progressive Party (NPP) leadership of the Puerto Rico Legislative Assembly ruled out on Wednesday approving legislation that would increase electricity rates on the island — a key provision in the Puerto Rico Electric Power Authority (PREPA) restructuring support agreement (RSA) with the public utility’s bondholders, Caribbean Business reported. The RSA requires lawmakers to approve legislation containing the rate hike as well as the creation of a “special purpose vehicle” (SPV) — similar to the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym)—that would issue new securitization bonds replacing existing bond issuances. The debt service on these bonds would be covered with additional revenue from a proposed surcharge, or “transition charge,” on customer electricity consumption during the 47-year period of the agreement. This charge could increase electricity costs by as much as 20 percent over the next five years. It would apply to all consumers regardless of whether they generate their own electricity, unless they disconnect completely and permanently from the PREPA grid. “We are not going to endorse any agreement, proposal or negotiation whose consequence will be increasing anything for any Puerto Rican,” Senate President Thomas Rivera Schatz told reporters Wednesday evening after coming out of a legislative conference meeting in which Gov. Wanda Vázquez Garced and Prepa Executive Director José Ortiz tried to persuade lawmakers to approve legislation they presented to increase PREPA rates by 4 percent to pay bondholders in the deal. Read more.
