By Nick Brown
NEW YORK (Reuters) - Puerto Rico's government on Tuesday said it will make a $13.9 million payment on June 1 to bondholders of the Employees Retirement System (ERS), the island's largest pension.
The agreement, announced at a hearing in federal court in Manhattan, settled a lawsuit filed on Friday as part of ERS' ongoing bankruptcy. It did not resolve a similar dispute over about $16 million owed on June 1 to bondholders of Puerto Rico's sales tax authority, COFINA.
A hearing on the COFINA dispute was underway in the Manhattan court on Tuesday.
The disputes are tied to Puerto Rico's massive economic crisis, which is marked by $70 billion in bond debt and another $49 billion in pension obligations.
Those debts have pushed the U.S. territory and some of its public entities, including COFINA and ERS, into the largest combined municipal bankruptcy in U.S. history.
COFINA IN THE SPOTLIGHT
COFINA owes more than $17 billion of the island's overall debt, and its bondholders say they are protected by an ironclad legal structure that separates COFINA from the rest of government and gives them a lien on the island's sales tax revenue.
Holders of more than $18 billion of Puerto Rican general obligation bonds, however, say their debt is guaranteed by Puerto Rico's constitution, and that they have a right to repurpose any revenue streams, including COFINA's, to repay their debt.
Tuesday's hearing centers on a request by the Bank of New York Mellon (N:BK), the trustee for COFINA bonds, to hold onto a $16 million payment owed on Thursday to COFINA bondholders until Judge Laura Taylor Swain decides whose money it is.
While that amount is a drop in the bucket, the hearing effectively begins the process of resolving sticky disputes, not only between GO and COFINA holders, but between senior and junior holders of COFINA debt.
A piece of Thursday's payment is owed to junior COFINA creditors. But senior holders, including Whitebox Advisors and Cyrus Capital Partners, argue a default has already occurred at COFINA due to Puerto Rico's indications that it will seek to cut debt repayments.
As a result, the senior group argues, BNY Mellon should accelerate payments to seniors and stop payments to juniors.