US shutdown threatens to delay major Puerto Rico debt case

SAN JUAN, Puerto Rico — The federal government shutdown could delay the outcome of a major debt restructuring case in Puerto Rico, leaving many in suspense after a long-awaited hearing on the deal ended Thursday without a ruling.

The deal involves more than $17 billion worth of government bonds backed by a sales-and-use tax. Opponents urged a federal judge to wait until the Internal Revenue Service can decide whether the exchange of those bonds should be treated as taxable or tax-free. And the IRS is among the agencies affected by the shutdown.

Judge Laura Taylor-Swain said she would not immediately rule on the deal, which was recently approved after more than 8,000 bondholders voted on it.

"I thank you all for the privilege of being in the entirely challenging position of making these important decisions for the future of Puerto Rico," she told the court.

If approved, Puerto Rico would pay $32 billion in the next 40 years. Senior bondholders, who hold nearly $8 billion, will be first to collect, receiving 93 percent of the value of the original bonds. Junior bondholders, many of whom are individual Puerto Rican investors and overall hold nearly $10 billion, will collect last and recover only 54 percent.

Junior bondholders who oppose the deal told the judge on Thursday that they were not adequately represented during the mediation process before it was approved.

"Puerto Rico took our money. Now it just wants to keep it," said Peter Hein, an attorney and junior bondholder who spoke from New York. "If Puerto Rico can just brush off ... bondholders ... respectfully, Illinois, New Jersey and Connecticut are not going to be far behind."

Also speaking from New York was Lawrence Devores, another junior bondholder. He reiterated that his group was not given opportunity to participate in the deal and criticized what he called "secret bargaining."

"Not only are we not getting a same recovery as the seniors ... but we're also being treated in a very miserable, shoddy way," he said. "It was a settlement imposed only by people looking out for themselves."

The elderly man said the bonds they would receive if the deal is approved would "mature well after I'm gone."

Several attorneys, including Dennis Dunne with Ambac Assurance, rejected the accusations and said no one was forbidden from participation. Dunne said everyone had a choice between protracted, costly litigation or a settlement, adding that the deal is not ideal "but the alternatives were worse."

Government officials also have said that Puerto Rico would receive an initial $350 million that will grow as part of the deal, money they say is urgently needed amid a 12-year recession and in the aftermath of Hurricane Maria.

But a group of activists that includes economists and attorneys who have long sought an independent analysis of Puerto Rico's debt argue that a portion of the sales-tax-backed debt is illegal. They also noted that nearly half of the debt is in hands of only 17 companies, including hedge funds.

Peter Friedman, a government attorney, said the lengthy litigation has already served as an audit, saying that everyone has examined the debt's validity in "extreme detail."

On Monday, the control board asked Swain to invalidate $6 billion worth of debt issued by Puerto Rico, including all general obligation bonds issued in 2012 and 2014, alleging that issuance violated debt limits established by the island's Constitution. Swain is holding a hearing on the issue at month's end.

If the deal involving sales-and-use-tax-backed bonds is approved, it would be the second debt-restructuring agreement since Puerto Rico announced it was unable to pay its debt in June 2015. In November, it completed the first with creditors holding more than $4 billion in debt issued by the now-defunct Government Development Bank.

During Thursday's public speaking period, Puerto Rico resident Rafaela Estevez said she opposes the deal in part because she does not trust the government's intent.

"Certain individuals are looking to make profit off the misery of our people," she said. "The people of Puerto Rico have had enough."