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Puerto Rico pension, highway agency join government in bankruptcy

NEW YORK (Reuters) - Puerto Rico’s federal oversight board has sought bankruptcy protection for the island’s highway authority and largest public pension, making them the latest commonwealth entities to turn to a court to work out debt.

The board filed the cases late on Sunday in U.S. District Court in San Juan, under a process akin to U.S. bankruptcy, known as Title III, that was created by the U.S Congress last year.

Puerto Rico’s central government, as well as its COFINA sales tax authority, are already in Title III bankruptcy, and a lawyer for the oversight board said last week other agencies would follow “soon.”

The latest filings could set the stage for an unconventional fight between retirees and the very lenders whose money was supposed to sustain them, an indication of just how complex Puerto Rico’s debt structure is.

The island has $70 billion in public debt, a 45 percent poverty rate and unemployment more than twice the U.S. average.

Its pensions owe another $50 billion to retirees who may face benefit cuts as part of Puerto Rico’s restructuring.

The pension in Title III bankruptcy, known as ERS, is unique in that it also owes $3.1 billion in bond debt, the result of an ill-fated financing effort in 2008 that was meant to plug its growing funding gap.

The structure of the bonds, which gives holders a lien on employer pension contributions, is exceedingly rare, and means bondholders may be battling with retirees for recoveries.

ERS was on track to deplete its reserves this month, potentially triggering a default, Moody’s Investors Service said in February.

A committee of pension bondholders, led by hedge funds Claren Road and Altair, sued Puerto Rico last fall to try to protect their lien, but the case is sidelined while the debt restructuring plays out.

Highway authority HTA owes some $6 billion in debt - including more than $46 million to Puerto Rico’s power utility, PREPA, according to the court filing.

It was not immediately clear whether the new Title III cases would be combined with the central government’s case.

Last week, Judge Laura Taylor Swain ruled that the central government and COFINA cases would be combined for administrative purposes.

Reporting by Nick Brown; Editing by Dan Grebler