- Island faces two new suits after passage of federal law
- Creditors seek to stop revenue diversions and moratorium law
While Puerto Rico is on a path to a historic debt restructuring, the commonwealth still faces legal challenges. Hedge funds and insurance companies are seeking to stop the island from redirecting revenue and imposing a moratorium on debt payments, with two suits emerging even after the passage of the Promesa bill.
The U.S. law, which means promise in Spanish, creates a federal control board that will oversee debt negotiations and seek to end Puerto Rico’s habitual budget deficits. It also aims to halt ongoing lawsuits and prohibits creditors from suing for repayment. Debt holders have still found ways to use the courts to protect their investments. The firms are contesting Puerto Rico’s claim that existing suits fall within the stay or claim the island’s fund transfers violate the Promesa law.
Grace Santana, Governor Alejandro Garcia Padilla’s chief of staff, said July 20 that the administration “would continue to aggressively fight Wall Street hedge funds’ lawsuits, which impose extraneous and unnecessary costs.”
Here is a list of lawsuits against Puerto Rico that deal with debt or revenue, in order of the most recent filings:
1. Assured Guaranty Corp. vs. Puerto Rico and its Highways and Transportation Authority:
The bond insurer sued late July 21 in a federal court in San Juan, seeking an emergency removal of Promesa’s stay and to stop Puerto Rico from taking toll revenue that repays the agency’s bonds and instead using those funds for other expenses. Assured guarantees repayment on approximately $1.2 billion of Highways debt, according to the compliant.
The case is Assured Guaranty Corp. et al v. Commonwealth of Puerto Rico, 16-cv-02384, U.S. District Court, District of Puerto Rico (San Juan).
2. Hedge funds holding general-obligation and commonwealth-guaranteed bonds vs. Garcia Padilla:
Aurelius Capital Management, Autonomy Capital, Covalent Partners, FCO Advisors, Monarch Alternative Capital and Stone Lion Capital Partners filed suit July 20 in a federal court in San Juan to stop Puerto Rico from transferring funds away from bondholders. The hedge funds say it violates the Promesa law since the federal legislation prohibits the island from enacting new laws diverting revenue or assets that would violate its constitution.
The case is Lex Claims et al v. Garcia Padilla, 16-cv-02374, U.S. District Court, District of Puerto Rico (San Juan).
3. Hedge funds holding 2014 general-obligation bonds vs. Puerto Rico:
Aurelius, Autonomy, FCO Advisors and Monarch sued the commonwealth on June 21 in Manhattan federal court, claiming the island cannot use its debt-moratorium law to suspend payments on the 2014 bonds. Puerto Rico’s constitution states that if commonwealth resources are insufficient to meet all of its desired spending, then public debt will be paid first, according to the complaint. Puerto Rico on July 19 filed a notice in the case, claiming the suit falls within Promesa’s stay provision. The court will address that notice. The 2014 general-obligation sale is the only commonwealth bond issuance where creditors can sue in a court off of the island.
The case is Jacana Holdings I LLC et al v. Commonwealth of Puerto Rico, 1:16-cv-04702, U.S. District Court, Southern District of New York (Manhattan).
4. National Public Finance Guarantee Corp. vs. Garcia Padilla:
The bond insurer filed suit on June 15 in a federal court in San Juan, seeking to limit the island’s debt moratorium law. National claims federal bankruptcy law preempts the moratorium legislation. It also violates the U.S. Constitution because it takes the insurer’s property without just compensation and impairs contract rights, National says. The firm insures about $3.8 billion of debt issued by Puerto Rico and its agencies, according to the complaint.
Puerto Rico claims Promesa’s stay halts National’s suit. Judge Francisco Besosa on Wednesday consolidated this case with another suit filed by holders of Government Development Bank debt to address the stay issue.
The case is National Public Finance Guarantee Corp. v. Garcia Padilla, 16-cv-02101, U.S. District Court, District of Puerto Rico (San Juan).
5. Ambac Assurance Corp. vs. Puerto Rico Highways and Transportation Authority:
The bond insurer filed suit on May 10 in a federal court in San Juan, requesting an immediate receiver to manage the Highways agency and claiming that a contract with a third-party operator may divert $115 million away from the Highways authority, which could affect repayment of debt. Ambac guarantees repayment about $472 million of Highways debt, according to the complaint.
The Highways authority filed a notice in the case, saying Promesa’s stay prohibits the Ambac case from moving forward. The court will address the stay issue.
The case is Ambac Assurance Corp. v. Puerto Rico Highways and Transportation Authority, 16-cv-01893, U.S. District Court, District of Puerto Rico (San Juan).
6. Hedge funds vs. Puerto Rico’s Government Development Bank:
Affiliates of Brigade Capital Management, Claren Road Asset Management, Solus Alternative Asset Management and Fir Tree Partners, which hold Government Development Bank debt, sued the bank on April 4 in a federal court in San Juan. The firms want to stop the bank from directing funds to local agencies as the GDB restructures its debt. The hedge funds on May 20 amended their complaint, seeking to invalidate portions of the island’s debt moratorium law.
Puerto Rico says Promesa’s stay blocks the hedge funds’ suit. Judge Besosa on July 20 consolidated this case with National’s suit to address the stay issue.
The case is Brigade Leveraged Capital Structures Fund Ltd. et al v. Puerto Rico’s Government Development Bank, 16-cv-01610, U.S. District Court, District of Puerto Rico (San Juan).
7. Bond insurers vs. Garcia Padilla:
Assured and Ambac sued the governor on Jan. 7 in a federal court in San Juan to stop Puerto Rico from taking revenue originally used to pay certain agency bonds and using that money instead to cover general-obligation bonds, called a claw back. The insurance companies claim it violates the U.S. Constitution because the action deprives them of their property rights. Financial Guaranty Insurance Co. filed a similar suit on Jan. 19. The court consolidated the two cases that month.
The case is Assured Guaranty Corp. et al v. Garcia Padilla, 16-cv-01037, U.S. District Court, District of Puerto Rico (San Juan).
The case is Financial Guaranty Insurance Co. v. Garcia Padilla, 16-cv-01095, U.S. District Court, District of Puerto Rico (San Juan).