As Confirmation Deadline Approaches, Puerto Rico’s HTA Debt Plan Faces Objections

With the hearing on the adjustment plan for the Puerto Rico Highways and Transportation Authority less than a week away, arguments remain over five legal objections to the plan.

Insured bondholders, Puerto Rico’s tax agency and financial advisory authority, HTA employees, an insurance company and a dairy are contesting the plan.

The adjustment plan confirmation hearing is scheduled to begin on Wednesday.

There are five objections to the Puerto Rico Highways and Transportation Authority’s proposed adjustment plan that will need to be addressed before or at the confirmation hearing beginning Wednesday.

Bloomberg News

“There are valid objections to the plan, but for the most part they would require modifications, not a rejection of the plan itself,” Puerto Rico attorney John Mudd said. “As in the Commonwealth plan hearing, Judge [Laura Taylor] Swain may require modifications, but [I] doubt she would reject the confirmation.”

The Puerto Rico Board of Supervisors said 99% of the various dollar claims voted in favor of the HTA plan. Opposing insured bondholders did not have the opportunity to vote, which would have been exercised by their insurer, Assured Guaranty. The FAFAA would not have voted either.

Franklin Advisers and Nuveen Asset Management hold $145 million of Assured HTA bonds. It is the bondholders who try to revise the adjustment plan and confirm the order.

In an objection to the plan filed on July 27, they said they bought some of the bonds with initial issue premiums of up to 15%. Over time, bonuses were paid down to a lower percentage.

Investment firms noted that the proposed adjustment plan gives insured bondholders two options. In the first option, they would get the Assured Acceleration Award from their insurer, Assured Guaranty. In the second option, the distributions from the plan and the bonds would be placed in a trust and they would be slowly repaid over the remaining term of the bonds.

The companies claim that the second option is not really different from the first, as Assured reserves the right to expedite payment.

They complained that Assured said the first option or any accelerated payment would not include coverage for premiums they paid that are unpaid.

In their objection, they put forward three legal arguments: the plan releases the Insured from his obligations without satisfying the legal standard for granting discharges to third parties; the plan accelerates the maturity of the obligations on the effective date of the adjustment HTA plan without the legal right to do so; and it modifies Assured’s obligations for bonds, which are based on contracts between the insurer and the bondholder, which the court has no right to modify.

The investment firms asked the court to remove a release for Assured from the HTA plan and confirmation order or allow the firms to opt out of the release before the effective date of the HTA. They also asked the court to revise the plan and confirmation order to remove the possibility that Assured could accelerate or otherwise prepay the obligations.

Assured Guaranty responded on Sunday, arguing that its policy explicitly mentions the possibility of accelerated payment. The policy also states that it “does not guarantee the loss of the prepayment premium”.

Assured said the second payment option for its insured HTA bonds was developed to allow holders, such as opponents, to keep their bonds and obtain interest payments.

Although the HTA bond resolution does not mention acceleration, acceleration is something that occurs by law and not by contract, Assured said.

Assured said the investment firms’ objection came after the court-ordered deadline and should be deemed dismissed on that basis.

Assured asked the court to dismiss the objection and confirm the plan.

For its part, the Supervisory Board said on Sunday that the adjustment plan did not include “non-consensual third-party releases.” He said a section of the HTA/Convention Center District Authority plan support agreement provided for the inclusion of bond acceleration. Similar provisions were included in the adjustment plans of the central government of Puerto Rico and the Puerto Rico Sales Tax Financing Corporation (COFINA).

The board of directors asked that the plan be confirmed without taking into account the objections of the investment firms.

On Wednesday, Judge Laura Taylor Swain told Insured Bondholders, Assured, and the Board of Trustees they had until Saturday to answer any questions she had about their arguments.

“It has never been clear to me from the time Franklin and Nuveen filed their objection to the freeway adjustment plan as assured bondholders that they had standing to object,” Cate said. Long, director of the Puerto Rico Clearing House. “In this specific case of bond insurance, and in bond insurance in general, the insured bondholder subrogates or conveys his right to vote on the issues proposed by the issuer to the insurer. … But that does not mean not if the bond contract is voided by a court does the insured have the right to claim that his contract of insurance on the underlying bond shall extend to the original maturity date of the bond.

“I think the argument that official statements don’t contain speedup language is of secondary importance and fundamentally irrelevant,” Long said.

FAFAA’s “limited objection” to the adjustment plan relates to Section 2.4, “because it seeks to exercise operational control over government entities in a manner inconsistent with PROMESA,” FAFAA said.

In its Sunday filing, the board said FAFAA opposes Section 2.4 of the plan which, among other things, separates highway assets from transit assets.

While the FAFAA said the U.S. District Court in Puerto Rico, as the bankruptcy court, had no jurisdiction to order this separation, the board said the court judge had jurisdiction both personal and material.

The board has “direct control” over the finances of the Puerto Rico Integrated Transportation Authority and the Department of Transportation and Public Works, the board said. The current year budget for Puerto Rico’s central government includes Section 2.4 transportation sector reform, the council said.

The bankruptcy code and Puerto Rico’s Supervision, Management and Economic Stability Act allow a court to transfer assets and make other operational changes, the board said.

Dairy Finca Matilda filed a challenge, a “reverse conviction” request for $7.5 million. He says federal law does not allow this to be compromised in bankruptcy. While the board challenges full payment for Puerto Rico’s central government bankruptcy in a petition for certiorari to the U.S. Supreme Court, it agrees to full payment if the Supreme Court fails to vacate lower court rulings on the matter.

Plaintiffs from Vazquez-Velazquez, a group of HTA employees, filed a lawsuit claiming that federal law requires their wages to be paid in full. The council rejected that, saying a court had dismissed their claims. The board said part of PROMESA allows federal laws to be overridden.

Another challenge to the HTA plan has been filed by Mapfre PRAICO Insurance Co. and Endurance Reinsurance Corporation of America, who say certain payments were missed by the insurance company. The board responded that if the court finds the claim secured, the board agrees that the company will receive all payment.

Under the terms of the HTA adjustment plan, holders of $4.3 billion of HTA bonds would receive $1.2 billion in new bonds with 5% coupons and $389 million in cash. The generosity of the deal depends on the type of HTA bond held.

Approximately $1.2 billion of the original face value is uninsured and the remainder is insured by Assured Guaranty, Financial Guarantee Insurance Corp. and Ambac Insurance.

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John A. Bogar