FGIC Seeks Intervention in Lex Claims Suit
The company that insures $1.14 billion in government bonds and $822 million in interest has filed a motion to intervene in the Lex Claims lawsuit in which general-obligation (GO) bondholders are challenging the constitutionality of the Puerto Rico Sales Tax Financing Corp. (Cofina).
Financial Guaranty Insurance Company (FGIC) –which also insures general-obligation bonds and bonds from the Public Buildings Authority, the Highway and Transportation Authority, the Convention Center District Authority and the Puerto Rico Infrastructure Financing Authority–, contends in documents filed last Thursday in U.S. District Court that its interests are not adequately represented in the case.
“FGIC is uniquely situated for two reasons. First, each time the Commonwealth defaults on bonds that FGIC has insured, FGIC is obligated to make payments, in contrast to the Lex Claims plaintiffs, which fail to receive funds owed to them. Second, FGIC holds or insures GO Bonds and Agency Bonds. The Lex Claims plaintiffs, as holders of only GO Bonds, do not adequately represent FGIC’s interests as a holder or insurer of Agency Bonds,” the company stated.
Since January 2016, the Commonwealth has clawed back hundreds of millions of dollars pledged to pay certain agency bonds, while leaving Cofina bonds untouched. Since August 2016 alone, the Commonwealth has paid approximately $724.1 million to Cofina.
“While FGIC is not only affected by the Commonwealth’s failure to pay GO Bonds with clawed back funds, FGIC is also uniquely impacted as an insurer or holder of Agency Bonds due to the disparate application of the claw back to funds pledged to Agency Bonds. It is this second facet – the disparate application of the “claw back” to collateral securing the Agency Bonds while leaving Cofina untouched – that sets FGIC apart from the Lex Claims plaintiffs,” the company said.
The Lex Claims action began on July 20, 2016 in which GO’s sought payment of their bonds. On September 2, 2016, the federal court decided that the stay on lawsuits imposed by Promesa did not apply to the Lex Claims lawsuit. On November 4, 2016, with the Court’s leave, the Lex Claims plaintiffs amended the suit to include Cofina as defendants, contending that money given to Cofina should be used to pay GO bonds.
In February, the court again denied a motion to stay on the lawsuit. The Oversight Board has filed an appeal with the U.S. First Circuit Court of Appeals seeking a stay on the lawsuit.