Puerto Rico HTA arguments focus on investment funds' dispute with Assured

A hearing to confirm the Puerto Rico Highways and Transportation Authority plan of adjustment mainly concerned a dispute between two investment funds and the Assured Guaranty bond insurer.  

Judge Laura Taylor Swain said she would consider the testimony before ruling on the plan and kept alive the possibility of a modified plan of adjustment or an informative motion filed to cover some changes. Another meeting is possible. 

Although Oversight Board Attorney Brian Rosen called the claims an "inter-creditor" dispute that did not impact the plan, the funds, Assured, and perhaps even Swain saw it otherwise. 

The investment funds — Franklin Advisors and Nuveen Asset Management —have argued Assured is offering them two options for payment but one would not cover the premium they paid for some of the bonds and the other would not necessarily cover it. They want the plan to guarantee return of their premium. 

Franklin and Nuveen Attorney Matthew Madden said cases show the U.S. bankruptcy code allows for limited acceleration if creditors ask for it, but only a contract can bring about a full acceleration (immediate payout) of all future payments. 

The plan would provide a legal release for Assured from future claims, he said, even though Assured said that is not in the plan. 

Assured Attorney Casey Servais said when Franklin and Nuveen bought the bonds with the insurance, they agreed the insurer would vote on any restructuring deal, if one became necessary. 

Swain said Assured was extensively relying on a case involving Oppenheimer but she was unsure the case was relevant on bankruptcy acceleration. 

If certain language was changed in the plan only regarding Assured's bonds, Servais said, it would allow parties to object to the plan based on "unfair discrimination." If that were the case, he added, Assured would have the right to terminate the underlying plan support agreement or it could withdraw its vote for the plan.

"There is a lot of potential for the plan to go back to square one if it is not approved in the form Assured currently supports," Servais said.

If Assured reached an undisclosed agreement with Franklin and Nuveen, he said, it could raise concerns of fraud. If it was reached publicly, it would require a new disclosure statement and a new vote.

Ambac Attorney Atara Miller said the firm did not insure Franklin and Nuveen-owned bonds in the HTA case but was concerned about the "rabbit hole" caused if the agreement were to be changed now. 

Attorneys for Financial Guaranty Insurance Corp. and National Public Finance Guarantee seemed to suggest they want the plan approved without changes. 

Swain asked Madden whether the plan could be preserved and satisfy the investment funds' objections, and he said there were ways for that to occur. 

On a different topic, Rosen said the Oversight Board addressed the Puerto Rico Fiscal Agency and Financial Advisory Authority's objections to the plan. FAFAA complained the plan mandated the local government to do things on transportation policy that the board should not have the power to require. 

FAFAA Attorney Peter Friedman said it and the board agreed on certain language and left other operational issues to be dealt with later. He said the authority was still concerned with some of the language, findings of fact and conclusions of law. 

Puerto Rico Attorney John Mudd said a group of HTA workers responded to federal government mandates for safety and should get compensated, as promised and should not be impaired in a municipal bankruptcy. 

Rosen said the compensation had nothing to do with federal law and even if the federal government had some impact on the pay, the board believes it is dischargeable in bankruptcy.

Finally, dairy Finca Matilda had raised an inverse condemnation claim, which it argued that federal law does not allow to be impaired in a bankruptcy. 

The board petitioned the U.S. Supreme Court to reverse lower court rulings that inverse condemnation and eminent domain claims cannot be impaired in bankruptcy. If the court upholds the rulings, Rosen said, the plan will pay Finca in full and the plan's language could be changed to make clear Finca would get post-petition interest. 

According to the terms of the HTA plan of adjustment, holders of $4.3 billion of HTA bonds would receive $1.2 billion of new bonds with 5% coupons and $389 million of cash. The generosity of the deal depends on what type of HTA bond is held.

Holders of HTA bonds may also receive recoveries through clawback contingent vehicle instruments on account of commonwealth/HTA claims against the commonwealth.

The plan settles about $2.2 billion of outstanding loans held by the Debt Recovery Authority, the successor of the Government Development Bank for Puerto Rico. 

About $1.2 billion of the original par value is uninsured and the rest is insured by Assured Guaranty, National Public Finance Guarantee, Financial Guaranty Insurance Corp., and Ambac Assurance.