Just days before the U.S. Supreme Court holds an oral hearing to review whether the Oversight Board members were constitutionally appointed, the U.S. highest court's ruling comes as a setback to the federal agency in the dispute over Pension Obligation Bonds (POBs).
Yesterday, the U.S. Supreme Court declined a petition by the Board seeking to reverse a First Circuit Court of Appeals´ ruling. The January 2019 appellate court ruling that found that ERS “bondholders met the requirements for perfection beginning on December 17, 2015,” that is, they have a legitimate claim on the pension funds assets.
The Supreme Court's decision would affect the debt adjustment plan recently filed by the Board and could even adversely affect the pension proposal for over 167,000 retirees. And this, because now that POBs are, in short, a secured debt, ERS bondholders would have priority over other ERS debts and, therefore, they could demand a higher repayment than that proposed by the fiscal entity.
According to the adjustment plan, the Board proposes to pay bondholders who own POBs only 13 cents on every dollar they lent to the Retirement Systems Administration (ERS). This would represent an 87 percent cut to such bonds, which totaled some $3.2 billion.
In contrast, in the case of pensions -which are not unsecured debt under the Bankruptcy Code- the Board´s proposal establishes that pensions under $1,200 will not be cut, while those over $1,200 will be paid at 92.5 percent.
The adjustment plan also proposes to establish a pension reserve fund ”to ensure sufficient funds for pension benefits for over 30 years,” which would initially start with $175 million and would receive additional injections in case of budget surplus.
However, the Board said yesterday that the court's decision will not affect the adjustment plan.
Currently, there is a lawsuit by the Official Committee of Retirees and the Board seeking to invalidate the POBs debt.
"The way the ERS bonds are treated under the plan has not been contingent on the outcome of this case,” the Board told El Nuevo Día, in referring to the ongoing litigation.
The U.S. Supreme Court's refusal to take up the Board's petition seems to be rooted in an August 2018 ruling, when Federal District Judge Laura Taylor Swain concluded that, due to an incorrect version of the pension fund’s name in financing statements, as requested by the Uniform Commercial Code (UCC), the bondholders “do not possess a perfected security interest” over property pledged by the ERS to pay the debt.
When the government issued the POBs in 2008, it was established that these bonds would be paid with the contributions the central government made as an employer to the public retirement system.
However, on January 30, when revoking Swain´s decision, the First Circuit Court of Appeals concluded that although there was an initial error in registering the lien, that was correct seven years later, so “the bondholders met the requirements for perfection beginning on December, 17, 2015."
The U.S. Supreme Court decision marks a victory for the owners of about $2.9 billion in POB bonds held by Andalusian Global Designated Activity Company, UBS Financial Services of Puerto Rico and Altair Global Opportunities, Glendon Opportunities Fund, Mason Capital Master Fund, Nokota Capital Master Fund, as well as several funds from Oaktree, Ocher Rose and SV Credit.
On the other hand, the U.S. Supreme Court decision to decline to take up the writ of certiorari represents uncertainty and possibly higher operational costs for players in the U.S. financial system who follow UCC rules when recording liens against the assets of companies or businesses that guarantee debt payment.
That is because as part of the controversy between the Board and Andalusian, Altair and others, the U.S. Commercial Finance Association (CFA) filed an amicus curiae (friend of the court) urging the highest court to take up the dispute.
In 2018, the members of the association, according to the appeal, managed some $300 billion of the secured funding granted that year.
"If lenders cannot be absolutely certain that their perfected liens will not be primed by other, hidden security interests, lenders will impose potentially onerous terms and costs to mitigate such risks, greatly reduce the credit made available, or not extend credit at all," the CFA said.
On October 15, the Supreme Court will review another writ of certiorari by the Board seeking to reverse the First Circuit Court of Appeals´ ruling that concluded that the Board´s members were unconstitutionally appointed since they should have been appointed "with the advice and consent of the Senate," under the appointments clause of the U.S. Constitution covering principal federal officers.