According to a statement released by Fitch Ratings on Thursday, 28th March, 2019, the decision of a U.S. Appeal Court in a lawsuit related to Puerto Rico’s bankruptcy raises concerns over the payment of municipal bonds backed by specific revenues during future Chapter 9 cases.
In a ruling of the Boston-based First Circuit court on Tuesday, 26th March, 2019 the court determine that municipalities are not required to make payments on debt secured by special revenues while bankruptcy proceedings are ongoing, although municipalities can voluntarily opt to do so.
In the statement released by Fitch Ratings, it was stated that the ruling which stated that making such payments are optional, creates uncertainty about full and timely payment of special revenue obligations during bankruptcy of the related municipality.”
In a further clarification Fitch Rating took a swipe of the ruling by stating that if the ruling stands, “It could negatively affect ratings on certain bonds secured by utility, transportation and tax revenue.”
The ruling of the U.S. District Court Judge, Laura Taylor Swain, who is overseeing Puerto Rico bankruptcy which was filed in 2017 in an effort to restructure about $120 billion of the U.S. commonwealth’s debt and pension obligations was reaffirmed by the Thursday, 28th March, 2019 U.S. Appeal Court ruling.
The U.S. District Court Judge, Laura Taylor Swain had dismissed a lawsuit by insurance companies guaranteeing payments on defaulted Puerto Rico Highways and Transportation Authority bonds. The bond insurers claimed that payments on the debt from pledged toll and other revenue should not be halted during the bankruptcy.
In response the Thursday, 28th March, 2019 U.S. Appeal Court ruling, one of the plaintiff in the lawsuit Assured Guaranty Corporation stated that they are assessing options, including an appeal to the U.S. Supreme Court.
Assured Guaranty Corporation stated in a press statement that, “We disagree with the court’s ruling, which is at odds with prior court decisions and the legislative history relating to special revenue bonds and has potential negative implications for revenue bonds throughout the municipal bond market.”
According to the Managing Director of Chapman Strategic Advisors, James Spiotto, who is also a Chapter 9 municipal bankruptcy expert in response to the U.S. Appeal Court ruling stated that the ruling came as a surprise to the municipal bond market, which had assumed an opposite of the situation. He further stated that this ruling could have a very adverse effect on the use of special revenues all over.
Data from Refinitiv indicates that revenue bonds accounted for an average of 64 percent of annual issuance in the $3.8 trillion municipal market of Puerto Rico since 1990. Not all revenue bonds qualify as being backed by special revenues under the bankruptcy code, which specifies special excise taxes or revenue derived from governmental projects or systems providing transportation, utilities or other services.
