Puerto Rico bankruptcy Judge Laura Taylor Swain threatened to dismiss the case and ordered the bankruptcy parties to mediation.
“My patience is wearing thin,” Swain said, noting the case has taken 4 1/2 years so far.
Puerto Rico could lose bankruptcy protection against bondholder suits, she said, as she might “be forced to consider” dismissing the Title III and Title VI protections.
The situation came to a head after Puerto Rico’s legislature failed to pass legislation the Oversight Board wanted for the Plan of Adjustment by the board’s deadline of 2 p.m. Friday, even after the board met lawmakers’ demands on key points like pensions.
Oversight Board Executive Director Natalie Jaresko asked the judge to adjourn the bankruptcies’ deadlines for 72 hours, offering to “withdraw” the Plan of Adjustment if the adjournment wasn’t allowed.
Instead, Swain ordered the board, the governor, the legislative leaders, and the attorneys representing the bondholders, retirees, and Unsecured Creditors Committee to meet in confidential mediation with Mediation Team Leader Barbara Houser. Houser must submit a report by 5 p.m. on Nov. 2 on whether the Confirmation Hearing scheduled for Nov. 8 can go forward as scheduled.
If Houser says it cannot go forward, the board must explain whether the proposed Plan of Adjustment can be confirmed without local legislation authorizing the new bonds and offer a detailed timeline for how the board proposes to advance toward a modified confirmable plan.
Second, it should offer alternative measures the board could take for a plan confirmation without local legislation support. As an alternative, the board should explain whether it would be moving to dismiss the Title III and Title VI bankruptcy proceedings concerning the central government’s $33 billion in debt.
“The court can reserve the right to order to show cause as to why such dismissal should not be considered,” Swain said.
The bankruptcy deadlines remain in place for the time being.
Dismissal of the Title III and VI bankruptcies would open the door to bondholders suing for the full payment of what would normally be due for their bonds. In some cases, with defaults having occurred, they could request accelerated payment and sue for full immediate payment of the bonds.
Those who hold debt guaranteed by the Puerto Rico government would be in the best position because the Puerto Rico constitution says this debt should be paid before all other expenses. The passage of the Puerto Rico Oversight, Management, and Economic Stability Act in the summer of 2016 superseded this, and the central government bonds have not been paid since then.
The board, through its lead attorney Martin Bienenstock and Jaresko, said that before Monday’s hearing it had reviewed amendments the local legislative leadership prepared and found them unacceptable. If they were passed, “we’d not be able to advance the plan because we’d not be able to say it is feasible,” Bienenstock said.
“I can’t underline enough how concerned the board is at this point,” Jaresko said.
“We really think this is a waste of time,” Bienenstock said of Gov. Pedro Pierluisi’s request for another 36 hours for the legislature to pass new legislation.
Puerto Rico House Speaker Rafael Hernández Montañez and Puerto Rico Senate President José Luis Dalmau also encouraged the judge to give the legislature a day or two more to pass a version of the bill that would authorize bonds.
The board’s concerns focus on proposed language on pensions that would be added to the bills, Jaresko said.
As a condition to issuance of the new bonds, the amendments would not allow any pension cuts, she said. While the board has promised no pension cuts for those currently receiving pensions, it is possible that Swain would require pension cuts, Jaresko said. If that were to happen, the bonds would not be issued.
Also at issue is an amendment eliminating the explicit authorization of an end to the cost-of-living adjustment that is found in the bill approved by the Puerto Rico House, Jaresko said. If the new amendment were to pass, the board is concerned the bonds would not be issued because the cost-of-living adjustment would be considered a “pension cut.”
The board wants the Puerto Rico Senate to pass the House version but the Senate, at least last week, did not have the votes to do so.
The bondholders’ Plan Support Agreement attorney Susheel Kirpalani said his group retained the right to ask for the dismissal of Title III, and asked the legislature to approve the new bonds. His group opposes the board’s request for an adjournment of deadlines.