With confirmation deadline looming, Puerto Rico HTA debt plan faces objections

Bonds

With the plan of adjustment hearing 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 Fiscal Agency and Financial Advisory Authority, HTA wage earners, an insurance company, and a dairy are challenging the plan. 

The plan of adjustment confirmation hearing is scheduled to commence Wednesday.

There are five objections to the proposed Puerto Rico Highways and Transportation Authority plan of adjustment that will have be to be dealt with before or at the confirmation hearing starting 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,” said Puerto Rico Attorney John Mudd. “As in the commonwealth plan hearing, Judge [Laura Taylor] Swain may require modifications but [I] doubt she would reject confirmation.”

The Puerto Rico Oversight Board said99% of the various dollar amount claims voted in favor of the HTA plan. The objecting insured bondholders did not have the option to vote, which would have been cast by their insurer, Assured Guaranty. FAFAA would also not have voted.

Franklin Advisers and Nuveen Asset Management hold $145 million of Assured HTA insured bonds. They are the insured bondholders trying to revise the plan of adjustment and confirmation order. 

In an objection to the plan filed on July 27, they said they bought some of the bonds with original issue premiums of up to 15%. Over time, the premiums have been paid down to some smaller percentage. 

The investment firms noted the proposed plan of adjustment offers insured bondholders two options. In option one they would get from their insurer, Assured Guaranty, the Assured acceleration price. In option two, plan distributions and bonds would go into a trust and they would be paid off slowly over the rest of the maturity of the bonds.

The firms argue option two isn’t really that different from option one because Assured retains the right to accelerate payment. 

They complained Assured is saying option one or any accelerated payment would not include covering the premiums they paid that are outstanding. 

In their objection they make three legal arguments: the plan releases Assured from its obligations without satisfying the legal standard for granting third-party releases; the plan accelerates the maturity of the bonds to the HTA plan of adjustment effective date without the legal right to do; and it modifies Assured’s obligations for the bonds, which are based on contracts between the insurer and the bondholder, which the court has no right to change.

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

Assured Guaranty responded Sunday arguing its policy explicitly mentions the possibility of acceleration of payment. The policy also says it does not “insure against loss of prepayment premium.” 

Assured said the second payment option for its insured HTA bonds was developed to let holders, like the objectors,keep their bonds and get interest payments. 

While 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 in after the deadline set by the court and should be deemed overruled on this basis. 

Assured called for the court to reject the objection and confirm the plan.

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

The board called for the plan to be confirmed without accommodating the investment firms’ objections.

On Wednesday, Judge Laura Taylor Swain told the insured bondholders, Assured, and the board, they had until Saturday to respond to questions she had concerning their arguments. 

“It was never clear to me from the time that Franklin and Nuveen filed their objection to the Highways plan of adjustment as insured bondholders that they had standing to object,” said Puerto Rico Clearinghouse Principal Cate Long. “In this specific instance of bond insurance, and in bond insurance generally, the insured bondholder subrogates, or passes their right to vote on issues put forward by the issuer to the insurer. … But that doesn’t mean if the bond contract is nullified by a court that the insured party has the right to claim their contract for insurance on the underlying bond extends until the original maturity date of the bond. 

“I think the argument that the official statements do not contain acceleration language is of secondary importance and basically irrelevant,” Long said.

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

In its filing on Sunday, the board said FAFAA is objecting to section 2.4 of the plan that, among other things, separates assets for highways from the assets for public transit.

While FAFAA said the U.S. District Court for Puerto Rico, as the court overseeing the bankruptcy, lacks jurisdiction to order this separation, the board said the court judge has both personal and subject matter jurisdiction. 

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

Both the bankruptcy code and the Puerto Rico, Oversight, Management, and Economic Stability Act allows for a court to transfer assets and make other operational changes, the board said. 

Dairy Finca Matilda filed a challenge, an “inverse condemnation” claim for $7.5 million. It says federal law does not allow this to be impaired in bankruptcy. While the board is challenging full payment in Puerto Rico’s central government bankruptcy in a petition for certiorari to the U.S. Supreme Court, it is OK with full payment if the Supreme Court fails to overturn the lower courts’ rulings on the topic.

Vazquez-Velazquez plaintiffs, a group of HTA wage earners, filed a challenge saying federal law mandates their wages be paid in full. The board rejected this, saying a court has dismissed their claims. The board said part of PROMESA allows overriding of federal laws.

Another challenge to the HTA plan has been lodged by Mapfre PRAICO Insurance Co. and Endurance Reinsurance Corporation of America, which argues certain payments were not paid to the insurance company. The board responded that if the court finds the claim to be secured, the board is OK with the company being paid all of it.

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

About $1.2 billion of the original par value is uninsured and the rest is insured by Assured Guaranty, Financial Guarantee Insurance Corp., and Ambac Assurance.

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