Assured Guaranty Pays Insured Bondholders Following Puerto Rico Default
SAN JUAN – Two bond insurance subsidiaries of Assured Guaranty Ltd. have made debt service payments to holders of insured general obligation (GO) and other bonds on which Puerto Rico and certain of its instrumentalities defaulted on July 1, the company said in a statement.
“As always, investors owning Puerto Rico-related bonds insured by Assured Guaranty will continue to receive uninterrupted full and timely payment of scheduled principal and interest in accordance with the terms of Assured Guaranty’s insurance policies,” the company stated.
However, in the same statement, Assured added: “It is regrettable that Puerto Rico has chosen to violate its constitution by ignoring the senior payment priority securing the Commonwealth’s GO bonds. The Puerto Rico constitution unambiguously states that the Commonwealth’s GO debt is to be paid before all other expenditures, and no funds may be applied to other obligations until the GO debt has been fully paid.
“The default on all the GO bond payments continues the pattern of bad faith and reckless disregard for the law that has characterized the current administration. Budgets recently proposed by both the Puerto Rico administration and the Puerto Rico assembly have referenced available monies for at least partial payments of the GO bonds. The decision to default in full on GO debt payments appears opportunistic in the wake of the recent enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which has a provision staying creditor lawsuits. Throughout the last week of June, in an effort to facilitate the administrative aspects of making timely payments to insured investors, Assured Guaranty attempted, to no avail, to determine from Puerto Rico which Assured Guaranty insured credits would have claims for July 1 payments.”
The insurer continued: “Additionally, Puerto Rico’s clawbacks, beginning in December 2015, of revenues pledged to certain non-GO debt would have been lawful and permissible only when all other revenue sources for GO payments had been exhausted, a condition that was not met at the time the clawbacks were initiated and that remains unmet. And insofar as clawbacks were constitutionally permitted, any funds clawed back may only be applied to pay GO debt. Puerto Rico has said that through June 30, 2016 it clawed back $453 million, of which it applied $164 million to GO bond payments due in January 2016. Of the $289 million balance, none was applied to the July 1, 2016 GO bond payments, $143 million is reportedly being held at the Government Development Bank where it is essentially frozen, and $146 million is reportedly being held at a commercial bank without disclosure of how such monies will be applied.
“The Commonwealth’s disregard for the rule of law has disastrous ramifications for Puerto Rico’s credibility and future access to the capital markets. It will increase the future cost of borrowing to fund the infrastructure it needs to revive its economy, and the ultimate victims will be the people of Puerto Rico, who have been badly served by multiple administrations.
Assured Guaranty and many retail and mutual fund investors have helped Puerto Rico fund its infrastructure for many years and have every interest in seeing Puerto Rico return to financial health and economic vitality. Unfortunately, the essential steps to achieve those goals, including coming to fair consensual agreements with creditors, rooting out corruption and tax avoidance, and making accurate and timely financial disclosures, have not been undertaken by the current government.
Despite the historic size of Puerto Rico’s default and the current administration’s contempt for the rule of law, Assured Guaranty will continue to work with other creditors, current and future Puerto Rico administrations and the PROMESA oversight board to achieve consensual agreements that respect the constitutional, statutory, contractual and property rights of creditors while also supporting the island’s economic recovery.”
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