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Puerto Rico pension bondholders’ claims ruled ‘unenforceable’

Bondholders in debt issued by Puerto Rico's Employees Retirement System were denied a bid to claim collateral property on Aug. 17 by the federal judge overseeing the commonwealth's bankruptcy proceedings.

U.S. District Judge Laura Taylor Swain for the district of Puerto Rico, San Juan, ruled that any security interest over ERS revenues, including employer contributions, held by the bondholders was "invalidated and unenforceable," since Congress gave authority to the Financial Oversight and Management Board to make changes. "Congress ... granted the oversight board a position that is superior to that of the holders of then-existing unperfected security interests," Ms. Swain said in the order.

The ERS bondholder group that sued, including Altair Global Credit Opportunities Fund and several Oaktree Capital Management (OAK) funds, held $2 billion of roughly $3.15 billion in ERS bonds as of February 2017, according to their court motion, which cited "an extensive security package at the time the bonds were issued to protect their investment ... Without this security package, it would have been impossible for the ERS to sell the bonds in the first place," the bondholders argued.

ERS, the largest public retirement fund, has no assets and is funding benefits as revenues come in. The ERS bondholders' motion noted "the commonwealth's decades of underfunding, its enactment of politically opportunistic benefit increases without allocating the funds to pay for them, and its repeated failure to address the growing pension problems despite many warnings." The motion also noted that the pension system did not properly account for changes in employer contributions or economic forces.

In June 2017, the oversight board required employers to bypass ERS and make pension contributions directly to the commonwealth's general fund. That resolution also ordered ERS to sell its assets and transfer the proceeds to the general fund.

The parties have until Sept. 7 to show cause for why the claims should not be dismissed.