Puerto Rico highway creditors take 'clawback' fight to court

A lawyer for Puerto Rico's financial oversight panel on Monday said the bankrupt island's highway authority could run out of cash if it continues to pay all its debt, and signaled big repayment cuts for the authority's creditors.

Attorney Martin Bienenstock made the comments at a court hearing related to Puerto Rico's bankruptcy, at which a creditor of the Highway and Transportation Authority, or HTA, sought to block the island's use of "clawbacks" - diverting toll revenue out of HTA's coffers.

HTA bondholders have a lien on that revenue, and want to keep getting paid.

But "once they take the money, we have no money to operate the highway authority," Bienenstock said in a Manhattan courtroom on Monday.

Judge Laura Taylor Swain scheduled a trial on the dispute for Aug. 8, in the Puerto Rican capital San Juan.

Eric Brunstad, an attorney for HTA creditor Peaje Investments, said HTA would be able to function while paying debt. "The parade of horribles is not so," Brunstad said.

The diversions, or "clawbacks," were imposed by the U.S. territory's government last year to keep Puerto Rico afloat as it battled $70 billion in debt, a 45 percent poverty rate and near-insolvent healthcare and pension systems. They applied to several public agencies, including HTA.

Now in bankruptcy, Puerto Rico - and the federal board appointed by U.S. Congress to manage its finances - will have to defend the clawbacks against creditors who have called them illegal.

The validity of the clawbacks will help determine the recoveries of bondholders of the affected agencies, and the liability of companies that insure those bonds, like Assured Guaranty (AGO.N).

Generally, agency debt is expected to fetch smaller recoveries than general obligation bond.

Bienenstock implied big cuts for HTA creditors, saying Peaje's claim on the agency's revenues is limited to what it had after the bankruptcy filing, not before.

"That's a very small number, unfortunately," he said. "Whatever right Peaje had (before bankruptcy) ... that right is a lot less valuable" now.

Monday's hearing was the first time since Puerto Rico's bankruptcy that the clawback issue was put before a judge, after Peaje sued the government last week.

Brunstad said current toll revenue reserves will run out in July, leaving creditors at risk of "irreparable harm" if clawbacks continue.

Judge Swain at times seemed skeptical, questioning whether the harm was irreparable if HTA creditors could conceivably be repaid later.

(Editing by Matthew Lewis)
By Nick Brown
Puerto Rico highway creditors take 'clawback' fight to court