Puerto Rico Ordered to Make Interest Payments on Pension Bonds

(Bloomberg) -- Puerto Rico must keep paying pension bondholders while the judge overseeing the island’s bankruptcy case decides whether the investors also have a right to retirement contributions made to government workers.

Puerto Rico, which has about $3 billion of pension bonds outstanding, owes about $13.9 million each month in interest to holders of the debt. It’s one of the few commonwealth securities that’s paying interest to investors.

The commonwealth sold the bonds in 2008 to help boost funding levels for its retirement system. That program is the worst-funded among U.S. states and territories, according to Moody’s Investors Service, and running out of cash. Its unfunded pension liability is approaching $50 billion. Bondholders include affiliates of Oaktree Capital Management LP, Altair Global Credit Opportunities Fund and Puerto Rico AAA Portfolio Bond Fund Inc.

Pension bonds maturing in 2038 traded Wednesday at an average price of 25.5 cents on the dollar, down from 38.1 cents on Sept. 18. Hurricane Maria struck the island on Sept. 20.

Pension bondholders claim they are entitled to so-called adequate protection payments because they have a lien on any contributions made by government agencies to their worker’s retirement system. The commonwealth disputes the bondholder claim, saying pension bondholders are trying seize money that should go to retirees.

While U.S. District Court Judge Laura Taylor Swain decides what rights bondholders may have to past and future retirement contributions, the government must keep paying the creditors. The amount of the regular payments will be based on interest due the holders, she said.

Other creditors, like general obligation bondholders, are not receiving any payments because they don’t have the same kind of lien, or collateral, claims. Cofina bondholders, who say their debt is backed by sales tax revenue, are not getting paid while a dispute about their rights winds its way through court.

Pension bondholders and the retirement system for government employees began fighting in court before the commonwealth filed bankruptcy in May. After the filing, the two sides worked out a temporary deal allowing bondholders to collect payments until at least Oct. 31, while they waited for the judge to make a final ruling on the collateral dispute. When Hurricane Maria struck in September, the resolution of that dispute was delayed.

Swain has not said when she will rule on the collateral fight. Should bondholders win, they would have rights to be paid from retirement contributions made by the various Puerto Rico government agencies on behalf of employees. If they lose, the bondholders would become unsecured creditors and likely see recoveries fall. They would also likely lose the right to the adequate protection payments.

The case is In re Commonwealth of Puerto Rico, 17-03283, U.S. District Court,District of Puerto Rico (San Juan).

--With assistance from Michelle Kaske

To contact the reporter on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net.

To contact the editors responsible for this story: James Crombie at jcrombie8@bloomberg.net, Christopher Maloney

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