Puerto Rico Mediator: More Fights Coming Before Bankruptcy’s End

(Bloomberg) -- Puerto Rico’s creditors and government officials have plenty left to fight about before the island has a chance to end its main bankruptcy case as soon as October, a federal court mediator said in a report Monday.

Although key bondholders and Puerto Rico’s financial oversight board reached a tentative deal during confidential mediation, many complex legal issues and disputes still being negotiated threaten to derail the bankruptcy-exit plan, the lead mediator, U.S. Bankruptcy Judge Barbara Houser, said in the court filing.

“The parties’ differences of opinion on certain issues have made that negotiation difficult,” Houser wrote to the federal judge overseeing Puerto Rico’s reorganization. “The mediation team agrees that these issues need to be decided on the merits as soon as possible, as the parties’ disparate views on these issues have been a handicap to the negotiation” of certain issues.

To avoid having the bankruptcy-exit plan get bogged down in court, Houser urged U.S. District Court Judge Laura Taylor Swain to temporarily halt certain suits, including a challenge to the legitimacy of some general-obligation bonds filed by a committee of unsecured creditors.

Other fights should be decided as soon as possible, including whether investors who hold revenue bonds have the right to to sue and what property rights, if any, they have.

Even so, on Sunday Puerto Rico’s financial oversight board and investors holding a big share of the island’s general-obligations and government-guaranteed debt reached a tentative agreement that slashes those obligations by 40% to $10.7 billion. The potential plan may help accelerate the island’s record bankruptcy because two key investors, Aurelius Capital Management and Autonomy Capital, signed on to the deal. Those firms hold debt that the board previously said should be invalidated.

That deal and others will be built into updated versions of the several bankruptcy-exit plans that restructure the island’s public debt. By temporarily halting the fight to invalidate some general-obligation bonds, Houser said, the bankruptcy exit plans will have a better shot at winning court approval in October. If the plans are approved, much of the island’s government can then exit bankruptcy by the end of the year, she said.

Creditor groups that have not yet signed final deals with the oversight board include bond insurers on the hook for some Puerto Rico debt, the committee of unsecured creditors and some pension bondholders.

In March, Swain will hold a hearing and possibly rule on one of the various disputes that threaten to disrupt the plan approval process, Houser said.

The case is The Commonwealth of Puerto Rico et al, 17-3283, U.S. Bankruptcy Court, District of Puerto Rico (San Juan)

To contact the reporters on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net;Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, William Selway, Christopher Maloney

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