Puerto Rico Faces Lawsuit Morass Over Defaults as Reprieve Endsby
Negotiations with bondholders haven’t resulted in a deal
A legal stay shielding the island from suits ends Monday night
Nearly two years after Puerto Rico started defaulting on its debt, the Caribbean island may start facing the consequences in court.
A temporary halt on legal challenges from bondholders seeking to force the U.S. territory to pay what it owes is set to expire Monday, exposing it to potentially adverse rulings in cases that have already been filed as well as new legal challenges. It may also prompt the island’s federal oversight board to initiate bankruptcy-like proceedings -- created under a U.S. rescue law enacted last year -- that would again place such cases on hold.
Without a deal with creditors to cut its debts or to suspend lawsuits, Puerto Rico’s quest to reduce its obligations is inching closer to a courtroom. The workout, however it’s done, will be the largest ever in the $3.8 trillion municipal-bond market, with the island’s $70 billion debt issued by more than a dozen agencies and backed by sometimes competing repayment pledges.
Governor Ricardo Rossello, who took office in January, says Puerto Rico can only pay less than a quarter of what’s owed to bondholders over the next decade, or an average $787 million annually, assuming he can reduce the budget and boost the commonwealth’s revenue collections. Bondholders and insurance companies question those projections and are pushing for larger principal and interest payments. The fiscal plan also doesn’t specify which bonds have the highest priority on the money that’s available, making it difficult for investors to gauge their potential losses.
So far, few signs of progress have emerged from negotiations between the commonwealth, mutual funds, insurers, hedge funds and local bondholders.
Following is a list of debt-related lawsuits against Puerto Rico, some of which have been consolidated. Most of the cases are in the U.S. District Court of San Juan, where Judge Francisco Besosa is presiding.
Puerto Rico’s constitution stipulates that these securities must be paid first, a pledge investors once viewed as near iron-clad protection against default. In July, however, Puerto Rico failed to make a full payment on the bonds as former Governor Alejandro Garcia Padilla instead conserved cash to keep the government running.
Hedge funds that hold general-obligation bonds and commonwealth-guaranteed debt claim Puerto Rico violated the federal rescue law, know as Promesa, when it began shifting money around ahead of the July default. The hedge funds are also seeking to stop Puerto Rico from prioritizing its sales-tax-backed bonds -- which aren’t in default -- over general obligations. The case is stayed through May 1.
The case, known as the Lex Claims, can be found here.
Hedge funds that purchased general-obligation bonds sold in 2014, the last time Puerto Rico issued such debt, also filed a separate case in federal court in Manhattan, claiming the commonwealth can’t use its debt-moratorium law to skip payments on those specific securities. That debt issuance, which came after its rating was cut to junk, is the only one that gave creditors the option to sue in a court off the island. The case is stayed through May 1.
To follow this case, click here.
Insurers Versus the Governor
A case filed by Assured Guaranty Corp. and Ambac Financial Group Inc., as well as another from rival Financial Guaranty Insurance Co., claim that Puerto Rico violated the U.S. Constitution by depriving them of their property rights when Garcia Padilla -- early in the debt crisis -- raided funds earmarked for some agency debts to avoid defaulting on general obligations. The cases can be found here and here.
Development Bank, University
MBIA Inc.’s National Public Finance Guarantee Corp., which insures about $3.6 billion of Puerto Rico debt, filed suit over Puerto Rico’s debt-moratorium law, saying it violates U.S. law and amounts to the seizure of property without sufficient compensation. Hedge funds that own Government Development Bank debt also challenge that law and are seeking to stop the bank from allocating cash to local agencies, while another was filed by aggrieved Puerto Rican residents who own GDB bonds. US Bank Trust National Association also sued over fund shifts by the University of Puerto Rico. The original complaints can be found here, here, here and here.
Separately, the trustee for the University of Puerto Rico medical school’s retirement program is seeking guidance on how to handle a wave of early withdrawal requests by participants worried about the system’s financial solvency. That case is here.
Highway and Pension Debt
Bond-insurer Assured sued the Highways and Transportation Authority for using toll money that it has borrowed against for other expenses. Hedge fund Peaje Investments LLC, a holder of highway debt, is pressing for the case to proceed. Another hedge fund, Altair Global Credit Opportunities Fund, sued the Puerto Rico employees retirement system, seeking to have contributions to the system placed in an account for bondholders while the case is on hold. The court on April 20 ordered the retirement system to direct money every month to repaying interest on the pension-fund bonds.
For the original court docket in each case, click here, here and here.