Oversight Board suit against law scuttling Plan of Adjustment to go forward

BY SourceMedia | MUNICIPAL | 09/15/21 01:59 PM EDT By Robert Slavin

Puerto Rico Judge Laura Taylor Swain rejected staying a suit against a law, Act 7, that would scuttle the proposed debt Plan of Adjustment.

Swain released her decision Tuesday rejecting Gov. Pedro Pierluisi?s request for the stay. Act 7 requires substantially higher pension payments, imposes limits on payments of bonds, and prohibits cuts to several government programs.

?The resolution of the question of Act 7?s legitimacy would be helpful to the parties? efforts to engage in substantive negotiations on the Plan of Adjustment,? Swain said. ?Currently, both sides are hampered by the uncertainty created by this dispute over Act 7 and are at odds over each side?s power and authority with respect to the Plan of Adjustment. A stay that prolongs this uncertainty would further burden the confirmation hearing process, not streamline it.?

On July 2 the board filed suit against Pierluisi, Puerto Rico Senate President Jos? Dalmau, and Puerto Rico House Speaker Rafael Hern?ndez Monta?ez to overturn the law.

According to the board?s suit, the act "purports to dictate the terms of a new Plan of Adjustment, contrary to the Oversight Board?s currently proposed Plan of Adjustment. The act would: (i) create new categories of ?Uncontested Bonds? and ?Contested Bonds?; (ii) provide no recovery to the latter; (iii) cap recoveries for the former at an aggregate maximum of 58%; and (iv) leave retirement claims unimpaired.?

In the governor?s request for a stay, Pierluisi said the stay should continue until the court reached a finding on the Plan of Adjustment. At the earliest this could take place in late November. Alternately, the governor asked the judge to stay the case until the board took a position concerning the two bills that the governor had introduced to replace Act 7.

Since the governor?s request for a stay, Dalmau and Hern?ndez Monta?ez filed oppositions to the request.

In her decision Swain considered and rejected five arguments made by Pierluisi and the Puerto Rico Fiscal Agency and Financial Advisory Authority.

They argued the board and the legislative leaders would suffer no harm if the court imposed a stay on the proceedings because the governor was not implementing Act 7. However, Swain said Act 7 ?is a fully enacted statute and governing law.?

Swain gave an example of article 2.04 of the law that limited FAFAA?s authority to ?assist in the creation, execution, supervision and oversight of any fiscal plan, budget, debt adjustment plan or Restructuring Support Agreement? that is contrary to Act 7?s policy pronouncements. Swain said Act 7 was harming the board?s interests despite the governor?s promise not to enforce it.

Pierluisi and FAFAA said a stay would not harm the board?s interests because the issues around Act 7 could be resolved more easily in the forum of the confirmation hearing for the board?s proposed Plan of Adjustment, currently scheduled for November.

?This argument is unavailing because Act 7 purports to control the government parties? ability to support the Plan of Adjustment, which is to be the subject of the confirmation hearing,? Swain said.

The governor and FAFAA said they would face a hardship if the stay was not issued because they are simultaneously engaging in discovery and negotiations concerning Puerto Rico?s central government debt.

?The court finds that the prejudice a stay would cause to the other parties through continued uncertainty over Act 7 and the alleged ongoing harm to the confirmation process outweighs any hardship that continuing with this proceeding would impose on the Executive Defendants,? Swain said.

Pierluisi and FAFAA said the stay would promote judicial economy ? that is, save time for the judge. Swain said waiting to see if the additional bills on similar topics to Act 7 would pass would not help matters as those bills would not repeal Act 7. Waiting to see the outcome of these bills would not ?resolve or narrow the issues presented in this adversary proceeding,? Swain said.

Finally, Pierluisi and FAFAA said a stay would allow them to focus more efficiently on Plan of Adjustment negotiations.

In response, Swain said nothing in the adversary proceeding prevents the parties from pursuing these negotiations.

Swain said the parties to the case had filed briefs and replies to briefs and the case was ?now ready for adjudication.?

Swain rejected the request for a stay and asked Magistrate Judge Judith Dein to handle the suit?s pretrial management.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.