Christian Sobrino Vega, executive director of the Fiscal Agency and Financial Advisory Authority. (GFR Media) (semisquare-x3)
Christian Sobrino Vega, executive director of the Fiscal Agency and Financial Advisory Authority. (GFR Media)

Christian Sobrino Vega, executive director of the Fiscal Agency and Financial Advisory Authority (FAFAA) said yesterday that the the First Circuit Court of Appeals decision on the Puerto Rico Employee Retirement System (ERS) will not affect pension payments to retirees in that system.

The decision of the U.S. appellate court reverses a previous ruling on Pension Obligation Bonds (POBs) what means that POBs bondholders can claim on ESR fund´s assets. In the bankruptcy world, that implies that POBs are secured debt and debt owners have priority over other creditors, such as pensioners. 

However, Sobrino Vega said they will evaluate the court´s decision to resolve whether to resort to the Supreme Court and whether the ruling may have a domino effect on the debt issued by other agencies of the Commonwealth or on Title III process.

Sobrino Vega assured that payments to pensioners will continue through Law 106-2017 that created the “Pay-Go” system.

That law provides for paying pensioners in that system through the General Fund once ESR assets have run out.

That system has no liquid funds since mid-2017.

“We have not decided if we are going to appeal, we´ll evaluate that with the (Oversight) Board that is representing Puerto Rico

For the official, the court reversal shows how important it is to negotiate with bondholders instead of confronting them.

Sobrino Vega mentioned the resolution on the Government Development Bank (GDB), the Cofina deal and conversations with the Electric Power Authority (PREPA) bondholders.

Last Wednesday, U.S. Circuit Judges Norman H. Stahl, Sandra L. Lynch and William J. Kayatta Jr.

reversed Swain´s decision that ruled that  bondholders “do not possess a perfected security interest” over property pledged by the public entity to pay its debt.

The decision was based on the fact that in 2008, the government issued $2,9 billion in PBO bonds and did not perfect the lien under the Uniform Commercial Code (UCC).

They determined that bondholders, headed by Altair Global Opportunities –part of UBS Financial Services in Puerto Rico-  met the requirements for perfection.

For judge Lynch, amendments to financial statements filed in 2015 and 2016 met the requirements for perfection when compared to 2008 financial statements and that PROMESA does not allow to avoid perfected liens.

Tipped Balance

Since the beginning of Title III cases, the First Circuit Court of Appeals has reversed Swain´s rulings four times.

Last August 8, 2018, the appellate court reversed  Swain´s decision by ruling that PREPA bondholders had the right to ask to lift the stay provided by PROMESA for the court to decide on the appointment of a trustee.

The same day, Boston upheld Swain’s decision, stating that Peaje Investment’s lien is not a statutory lien over the Highway and Transportation Authority (HTA) and ordered Swain to direct a judicial process.

In September 2017, Boston also reversed Swain. This time, they decided that the Unsecured Creditors Committee (UCC) –contrary to Swain´s ruling- could take part on a lawsuit filed by Assured Guarantee against the Board aiming at annulling the Fiscal Plan.

They will fight

After the ruling, Miguel J. Fabre, president of the  Official Committee of Retired Employees of the Commonwealth of Puerto Rico (COR), also participating in Title III cases, expressed his concerns and said that COR will continue filing proper legal arguments regarding these issues in the district court and appellate courts to protect the interests of retirees and ESR beneficiaries.

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