The federal judge overseeing Puerto Rico's complex bankruptcy case ruled Thursday against a group of bondholders seeking pension assets and a share of future revenue.
U.S. District Judge Laura Taylor Swain in San Juan ruled in favor of the Employees Retirement System of the Government of Puerto Rico and the federal oversight board, dismissing arguments by ERS bondholders that they were entitled to some assets that existed when they bought the bonds as well as future pension contributions, which are now coming from general revenues.
Ms. Swain said in her ruling that Congress expressly incorporated bankruptcy tools, including the ability to limit liens, in the Puerto Rico Oversight, Management and Economic Stability Act, and the court "cannot subvert the clear intent of Congress."
On June 12, the Financial Oversight and Management Board for Puerto Rico and the group representing pension plan participants reached an agreement to protect retiree benefits as the commonwealth goes through bankruptcy proceedings.
The group, the Official Committee of Retired Employees of the Government of Puerto Rico, whose Spanish acronym is COR, was appointed by the U.S. trustee to represent more than 167,000 government retirees from the Employees Retirement System of the Government of Puerto Rico, the Teachers Retirement System and the Judiciary Retirement System.
"This is a very important and appropriate ruling from the court," COR counsel Robert Gordon, a partner with Jenner & Block LLP, said in an email. "Judge Swain correctly ruled that the security interests of holders of ERS bonds do not extend to employer contributions that ERS may have received" (after ERS filed its bankruptcy case).
Mr. Gordon added that, given recent agreements reached with the oversight board, including the one with COR, "it appears that momentum is developing toward a plan of adjustment for Puerto Rico."
A plan of adjustment is the next big step in Puerto Rico's restructuring of $55 billion in pension liabilities and more than $70 billion in bondholder debt. Once the oversight board proposes a plan of adjustment, the various creditor classes with claims will vote for or against it before it can be finalized by the court.
The oversight board announced June 16 that it reached an agreement with bondholders to restructure $35 billion in debt, reducing the amount of outstanding bonds by more than 60%, to less than $12 billion, and cutting the commonwealth's debt service, including principal and interest, to $21 billion from $43 billion.
The oversight board is also suing ERS bondholders, seeking to invalidate more than $3 billion of ERS bonds and to recover principal and interest payments of nearly $400 million made to ERS bondholders.