Jan 30 (Reuters) - Bondholders that own nearly $3 billion of debt issued by a Puerto Rico retirement system have a claim on the pension fund’s assets, a U.S. appellate court said on Wednesday.
The reversal of a district court ruling could complicate efforts by Puerto Rico’s federally created oversight board to restructure about $120 billion of the U.S. commonwealth’s debt and pension liabilities through a form of municipal bankruptcy.
The board in July 2017 challenged bondholders’ security interest in debt sold by Puerto Rico’s largest pension fund, the Employees Retirement System.
In August, U.S. District Judge Laura Taylor Swain, who is hearing the bankruptcy case filed in May 2017, ruled that the bondholders “do not possess a perfected security interest” over property pledged by the bankrupt public entity to pay its debt.
Her opinion also said that their claim over the pension system’s revenue was “invalidated and unenforceable.”
The 1st U.S. Circuit Court of Appeals determined, however, that “the bondholders met the requirements for perfection beginning on December 17, 2015, and so reverse the district court.” Puerto Rico’s pension system liquidated all of its cash assets, facing a nearly 100 percent funding shortfall that is thought to be the largest ever for comparably-sized U.S. public pensions. The government moved to a pay-as-you-go basis, a system in which pension benefits are paid out of the island’s general fund. The oversight board is turning its attention to Puerto Rico’s roughly $13 billion of general obligation bonds and almost $50 billion of unfunded pension liabilities after completing a restructuring of the island’s Government Development Bank debt. It is currently awaiting court approval of a deal over debt from the Sales Tax Financing Corporation, known as COFINA.
A restructuring of Puerto Rico Electric Power Authority debt is also in the works. (Reporting by Karen Pierog in Chicago and Luis Valentin Ortiz in San Juan; Editing by Peter Cooney)