• The San Juan Daily Star

Judge takes POA confirmation under advisement

U.S. District Court Judge Laura Taylor Swain

By The Star Staff

U.S. District Court Judge Laura Taylor Swain took the matter of confirming the plan of adjustment (POA) that would restructure some $33 billion in central government debt under advisement on Tuesday rather than issuing an immediate ruling after the Financial Oversight and Management Board for Puerto Rico wrapped up its arguments in favor of the debt deal.

At 11:20 a.m., Swain ended closing arguments on the largest bankruptcy ever in the municipal market’s history. Before that, the judge also took under advisement rulings on whether to grant the Title VI qualifying modification for the Puerto Rico Infrastructure Financing Authority (PRIFA) and the Convention Center District Authority. PRIFA’s debt will be repaid through rum excise taxes.

The restructurings of the Puerto Rico Electric Power Authority and the Highway and Transportation Authority are still pending.

During Tuesday’s arguments, oversight board attorney Brian Rosen, a lawyer with Proskauer Rose, addressed releases that are part of the plan and to which opponents objected. He noted that the releases were a key component of the plan negotiation process: a robust give and take that takes place during mediation. He said they were important in getting creditors on board with the plan support agreement.

Rosen asserted that the oversight board inserted language into both the plan and confirmation order that states there are no third-party releases.

He also discussed exculpation provisions under the plan. Like releases, Rosen said, exculpation provisions are customary in the context of a major restructuring, and are intended to apply only within the Title III process.

Michael Mervis, another lawyer with Proskauer Rose, objected to arguments made by retail bondholder Peter Hein on Monday. Hein asserted that the oversight board’s best interest study from McKinsey & Co. Puerto Rico Consulting “fell apart after a witness admitted that the analysis McKinsey conducted was based on legal assumptions that the [board] itself provided.” The study evaluated whether creditors would be better off in their recoveries outside of the bankruptcy.

Mervis said Hein never disputed that given all the litigation involved in the case, legal assumptions had to be used. Mervis argued that using legal assumptions is only bad if the assumptions themselves are. He said Hein was actually challenging whether bond debt should be paid before operating expenses. Hein argues that bondholders should be paid, but the oversight board disagrees.

Hein has also argued that under the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, the court must consider other statutory frameworks that can provide creditors with a better recovery than the proposed plan. He has also said Puerto Rico has sufficient money to repay existing debt.

Martin Bienenstock, also a lawyer with Proskauer Rose, objected to arguments raised by the Fiscal Agency and Financial Advisory Authority against the inclusion of Acts 80, 81 and 82 in the list of laws the oversight board wants to preempt. The laws protect pension benefits. He said changes to public employee pensions are a critical part of the proposed POA and that legislative efforts to enact pension reforms this month were inconsistent with the fiscal plan certified by the board.

He insisted teachers’ pensions are protected under the debt deal but that there is not enough cash to honor their claims. He also said the last two fiscal plans called for hikes in the salaries of teachers, disputing claims they have not received a raise.

Unions representing teachers and other public employees had argued the plan impacts them unfairly. The proposed changes to the pension systems are projected to save $4.7 billion over the next 10 years, but a teachers union argued Monday that, aside from the freeze and elimination of cost-of-living adjustments reducing their benefits, they would also likely delay retirement for current teachers by about three years.

The POA will impose a freeze on defined benefit pensions and eliminate cost-of-living adjustments for government retirees. An 8.5% reduction in monthly pensions for retirees receiving more than $1,500 in an earlier version of the plan was eliminated.

Lawyers also asked the court to reject claims from some creditors that they were not getting just compensation as part of eminent domain and that the POA violates the Takings Clause. Those creditors have challenged the constitutionality of the plan, and Swain earlier this week gave the U.S. Justice Department until Jan. 7 to determine if it will intervene in the challenge.

The confirmation hearings began on Nov. 8, about four years after the oversight board filed the bankruptcy cases in 2017. The board filed a revised version of the eighth amended POA before starting the confirmation hearings, and again last Sunday.

The proposed plan would reduce the commonwealth’s outstanding debt by almost 80%, from $33 billion to $7.4 billion.

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