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Federal Judge Freezes $16 Million Puerto Rico Debt Payment Due June 1 Subject To Claims From Hedge Funds

“PALACE OF THE LAWS”: The Capitol of Puerto Rico (Capitolio de Puerto Rico) is located on the Islet of San Juan just outside the walls of Old San Juan. The building is home to the bicameral Legislative Assembly composed of the House of Representatives and Senate. The building sits in the Puerta de Tierra sector of San Juan.

By NICK BROWN
Reuters News Service
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SAN JUAN — A federal judge on Tuesday ordered the trustee for Puerto Rico’s COFINA bonds not to make a $16 million payment due on June 1, allowing creditors to litigate competing claims to the money that could be central to how the bankrupt U.S. territory restructures debt.

Judge Laura Taylor Swain made the ruling during a hearing in her Manhattan courtroom, putting a freeze on the payments while stakeholders hash out central disputes over who is to be paid first and from which revenue sources.

Puerto Rico, with $70 billion in bond debt and another $49 billion in pension liabilities, is embarking on the biggest financial restructuring in U.S. municipal history. Sorting out obligations of the COFINA sales tax authority, which owes some $17 billion, is arguably the biggest task in the restructuring.

The Puerto Rico Urgent Interest Fund Corporation (also known as the Puerto Rico Sales Tax Financing Corporation) {Spanish} Corporación del Fondo de Interés Apremiante (COFINA)— is a government-owned corporation of Puerto Rico that issues government bonds and uses other financing mechanisms to pay and refinance the public debts of the U.S. commonwealth.

Swain’s ruling granted a request by the COFINA trustee, Bank of New York Mellon (BK.N), for “interpleader,” a move authorizing the bank to hold onto the interest payment due on Thursday without fear of liability, while claims over the money are resolved.

Judge Swain did not rule on the underlying claims, a process that could take months, but said “their existence makes it clear that interpleader is warranted.”

Senior creditors of COFINA argue the authority has already defaulted, through the Puerto Rican government’s indications that it plans to cut debt repayments. They say junior COFINA creditors should therefore stop being paid, to ensure payment for seniors.

Meanwhile, holders of Puerto Rico’s $18 billion in general obligation (GO) debt argue that COFINA’s assets belong to them, under a constitutional guarantee giving them first claim on all the island’s resources.

By freezing Thursday’s payment, Judge Swain is giving sides the green light to litigate at least parts of these issues, though the primary dispute is the one between senior and junior COFINA creditors. Judge Swain stressed she was not ruling immediately on whether GO holders would be allowed to intervene.

Separately on Tuesday, Puerto Rico’s government said it would make a $13.9 million payment on June 1 to bondholders of the Employees Retirement System, the island’s largest pension, settling a lawsuit filed last week.

(Reporting by Nick Brown; Editing by Meredith Mazzilli)

(REUTERS NEWS SERVICE)

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The Author

John McCarthy

John McCarthy

John McCarthy is primarily known for his investigative reporting on the U.S. Virgin Islands. A series of reports beginning in the 1990's revealed that there was everything from coliform bacteria to Cryptosporidium in locally-bottled St. Croix drinking water, according to a then-unpublished University of the Virgin Islands sampling. Another report, following Hurricane Hugo in 1989, cited a Federal Emergency Management Agency (FEMA) confidential overview that said that over 40 percent of the U.S. Virgin Islands public lives below the poverty line. The Virgin Islands Free Press is the only Caribbean news source to regularly incorporate the findings of U.S. Freedom of Information Act requests. John's articles have appeared in the BVI Beacon, St. Croix Avis, San Juan Star and Virgin Islands Daily News. He is the former news director of WSVI-TV Channel 8 on St. Croix.

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