COURT: Puerto Rico revenue bond decision should be overturned on appeal, municipal bond analysts argue

17 May 2018
 
The judge overseeing Puerto Rico’s Title III bankruptcy proceedings erred in a ruling that stands to upend the revenue bond market, the National Federation of Municipal Analysts (NFMA) argued yesterday (16 May).
 
Judge Laura Taylor Swain dismissed on 30 January a lawsuit brought by Puerto Rico Highways and Transportation Authority (PRHTA) bond insurers that sought to force the highways authority to make debt service payments with toll revenue that backed the bonds.
 
Judge Swain ruled that bond insurers, which cover USD 2.6bn of the USD 4.5bn in outstanding toll revenue debt, had not shown that bondholders were entitled to special revenue payments. She found that insurers didn’t show that the PRHTA had violated lien protections, nor does the relevant portion of the bankruptcy code mandate payment or timing of payment of special revenue debt.
 
The NFMA yesterday asked to submit an amicus curae brief to argue against that decision, which, they said, jeopardizes the municipal revenue bond market.
 
Revenue bonds are priced by assessing the level of risk associated with the amount of revenue that the bonds will generate and whether those revenues will be applied to bonds, the NFMA said.
“The court…held, to the surprise of participants in the municipal markets, that the [relevant] provisions [of the bankruptcy code] do not, as had been previously understood, operate to require the continued application of project revenues to revenue bonds secured thereby… nor permit the enforcement of a lien on such revenues without first obtaining relief from the automatic stay,” the NFMA said. “This result is contrary to the terms of the statute and the purpose for which [the statutes] were enacted.”
 
If the decision is upheld, the result will be that revenue bonds will become more expensive for all US municipalities to sell, the NFMA argued.
 
“This cost increase will be borne by the municipal issuers themselves and their citizens, at a time when municipalities are confronting both infrastructure and financial challenges, the need for affordable revenue bond financing is acute, and in the absence of such financing critical infrastructure Projects may be cancelled or delayed,” the NFMA argued.
 
The appeal is Assured Guaranty Corp. et al. v. Commonwealth of Puerto Rico et al. before the US Court of Appeals for the First Circuit under case number 18-1166.
 
The originating cases are Assured Guaranty Corp et al v Commonwealth of Puerto Rico et al, case numbers 17-00155 and 17-00156, in the US Bankruptcy Court for the District of Puerto Rico.
 
CLICK HERE to see the proposed appellate brief.
CLICK HERE to see all commonwealth Title III filings in Debtwire Dockets.