Puerto Rico Sued by Third Bond Insurer to Halt Revenue Raid

  • FGIC seeks to end the revenue diversion that spurred default
  • Suit follows similar ones by Ambac and Assured Guaranty

Financial Guaranty Insurance Co. sued Puerto Rico’s top officials for raiding revenue earmarked for government agency bonds as the island rapidly runs out of cash, a step that pushed it to default this month on securities the company insures.

QuickTake Puerto Rico’s Slide

FGIC asked the U.S. District Court in Puerto Rico to block Governor Alejandro Garcia Padilla’s administration from diverting revenue that’s pledged to repay debt issued by some agencies, according to a Jan 19 lawsuit. The governor’s decision last month to do so forced the Infrastructure Financing Authority, called Prifa, to miss a $35.9 million interest payment due on Jan. 4, requiring FGIC to pay 22 percent of $6.4 millionin interest that it guarantees.

FGIC’s suit follows similar ones filed by Ambac Financial Group Inc. and Assured Guaranty Ltd. two weeks ago. The diversion of revenue allowed Puerto Rico to avoid defaulting for the first time on general-obligation bonds, which have the highest legal priority under the island’s constitution. The court consolidated FGIC’s complaint with Ambac and Assured Guaranty’s suit on Thursday, according to court documents. Judge Jose Antonio Fuste will preside over the case.

The insurers say the roughly $9 billion of revenue the island expects to collect in the fiscal year ending in June exceeds Puerto Rico’s $1.87 billion of debt-service costs, showing that it doesn’t need to redirect funds away from Prifa and other agencies. Garcia Padilla has said he has an obligation to protect residents from deep service cutbacks needed to cover its debts.

“The purpose of the clawback is to provide an additional source of payment for the public debt only when all other available resources for an entire fiscal year are insufficient for that purpose and not to provide an additional source from which the commonwealth can fund government operations or other expenditures,” FGIC said in its suit.

FGIC insures repayment of $768.8 million of Prifa’s principal and interest through 2045, as of Sept. 30, according to its website. It insures $10.6 million of debt service in 2016, according to Edward Turi, general counsel for the insurer.

Puerto Rico’s debt crisis erupted after years of borrowing to fill budget deficits as the economy failed to grow. The commonwealth says it expects to have $23.9 billion less than it will need over the next decade to repay principal and interest, according to an updated fiscal and economic growth plan released Monday. Officials revised the government’s five-year financing gap to $16 billion from an estimate of $14 billion in September.

Before it's here, it's on the Bloomberg Terminal.