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Puerto Rico Bankruptcy Judge Seeks to Break Impasse on Pensions

Oct. 25, 2021, 4:42 PM

A federal judge ordered Puerto Rico lawmakers into mediation with a financial oversight board in an effort to settle disagreements over how to handle pensions in the island’s bankruptcy, seeking to break an impasse that’s imperiled the current plan for slashing the territory’s debt.

U.S. District Court Judge Laura Taylor Swain set a Nov. 2 deadline to see whether a debt-restructuring plan can proceed.

The decisions came at a hearing Monday where Swain threatened to consider dismissing Puerto Rico’s more than four-year bankruptcy case, the largest ever in the municipal-bond market, if there are no prospects for acting on the restructuring plan soon.

“I will be frank with you, my patience is wearing thin,” Swain said during the hearing. “None of us has another four or five years for a do over and least of all, the people of Puerto Rico.”

A dismissal of Puerto Rico’s bankruptcy would upend years of negotiations with bondholders, insurance companies and labor groups over how to handle $33 billion of the island’s remaining debt, including $22 billion of bonds backed by the central government. Such a decision would allow investors to sue Puerto Rico for repayment of bonds because a stay on such actions would be lifted without bankruptcy protection.

Judge Barbara Houser, who heads the bankruptcy’s mediation team, will report back to Swain on Nov. 2 on whether the current plan should go forward on schedule, should be delayed, or possibly scrapped entirely. The board can then decide whether to abandon the plan. The oversight board cannot seek to withdraw its debt adjustment plan from the court before that date, Swain said. The board last week warned it could ask the court to delay confirmation hearings set for November.

Swain ordered the island’s senior politicians into mediation, using the same process that previously helped bridge differences between bondholders and the board. The purpose is to end their standoff over whether to freeze future pension hikes.

Board lawyer Martin Bienenstock said the debt-cutting plan won’t successfully steady the government’s finances unless there is a freeze to pension benefits that current teachers and judges will collect when they retire and the elimination of future cost-of-living increases.

The debt-cutting agreement struck with major bondholders has been imperiled by the territory’s legislature, which failed to approve a measure that would allow Puerto Rico to issue new debt to implement it. Under the deal, investors would exchange their debt for a lesser amount of new bonds, reducing what the government owes.

Puerto Rico’s legislative leaders late Sunday, however, reached an agreement that could end the stalemate and lawyers for the Senate and Puerto Rico’s governor said they expect the legislature will pass the measure by Tuesday.

Still, the oversight board has concerns about that pact because it may place restrictions on the issuance of new debt if Judge Swain determines there must be pension cuts in the overall plan of adjustment, Natalie Jaresko, the board’s executive director, said during the hearing.

Puerto Rico has been in bankruptcy since May 2017, after years of population loss, economic decline and borrowing to pay for operating expenses.

To contact the reporters on this story:
Michelle Kaske in New York at mkaske@bloomberg.net;
Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editors responsible for this story:
Elizabeth Campbell at ecampbell14@bloomberg.net

William Selway

© 2021 Bloomberg L.P. All rights reserved. Used with permission.

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