Puerto Rico Gov’t Sued by 2 Insurers Over ‘Illegal’ Clawbacks
SAN JUAN — Two Puerto Rico bond insurers, Ambac Assurance Corp. and Assured Guaranty, announced Thursday, Jan. 7, they had filed suit against the commonwealth for redirecting pledged revenues, known as “clawbacks,” to pay constitutionally guaranteed debt service, a move the monolines deem as illegal and invalid under the U.S. Constitution.
On Friday, García Padilla issued a statement in which he said: “Just as we had repeatedly warned, the commonwealth was sued last night by two Wall Street insurers. This action will prompt creditors to race to court to get the commonwealth to meet its payments even though we do not possess a legal framework to resolve this impending litigation crisis.”
The lawsuit came hours after a spokesperson for the Justice Department told Caribbean Business in a written statement that no legal action had been initiated following the Puerto Rico government’s failure to pay roughly $36 million in interest due Jan. 4 on Infrastructure Financing Authority (Prifa) debt. It remains to be seen whether the federal district court where the lawsuit was filed takes the case or decides a local court should act on the matter.
Puerto Rico, under its Constitution, has the right to claw back certain revenues to service its general obligation (GO) debt, but that right is subject to important preconditions, Ambac further stated. “Revenues can only be clawed back if no other revenues or moneys are available to pay the GO bond payments. For fiscal year 2016, the Commonwealth forecasts approximately $9.0 billion of available resources, which vastly exceeds debt service on the public debt of approximately $1.85 billion,” it adds.
Although defaulting on the $36 million Prifa payment, the commonwealth government paid more than $850 million due Jan. 4 in debt service across several credits. In doing so, the Alejandro García Padilla administration pulled the trigger on clawback clauses to pay its GO obligations. It also tapped reserve funds to complete several public corporations’ debt payments also due Jan. 4.
Clawbacked revenue streams include those of the Highways & Transportation Authority (HTA), Convention Center District Authority (CCDA) and Prifa. Ambac argues the use of the clawback mechanism “contributed to the government’s default” on Prifa debt, “and will eventually cause a default on HTA and CCDA bonds.”
Following Prifa’s default, Ambac and FGIC had to cover part of the missed $36 million payment, as they both insure part of the affected debt. In a letter to the Puerto Rico government released a few days before the Prifa payment due date, both monolines blasted the decision to claw back Prifa’s revenue source, federal rum cover-over taxes, since it allegedly “violates numerous statutory and state and federal constitutional provisions.” They also posited that the commonwealth claw-backed as much as $94 million of the federal rum taxes before the governor signed the executive order on Dec. 1 that allowed for such action.
On Thursday, Tavakoli said Ambac has tried to engage in consensual talks with the commonwealth government toward finding “amicable solutions” for the island’s fiscal woes, “only to be rebuffed. Instead the Commonwealth has committed itself to a ‘scorched earth’ strategy of blaming its fiscal and structural problems on lenders, Congress and others, in an effort to deflect responsibility and obtain retroactive application of bankruptcy laws.”
He added that Ambac remains “hopeful” the García Padilla administration stops clawing back, or redirecting previously pledged revenue, “and turn instead toward good faith negotiations aimed at solutions instead of confrontation.”
Meanwhile, the García Padilla administration’s legal team was already on high alert and prepared to counter potential litigation resulting from the government’s latest fiscal maneuvers. “The Justice Department has been preparing for this eventuality, so it has formed an internal team to address what might happen, which will be joined by some external lawyers, who are experienced in this type of litigation,” the Justice Department spokesperson further stated Thursday.
“Puerto Rico’s creditors will soon face a process in which they do not have a rule of law whereby their claims are addressed in an organized manner. That reality places us in an uncertain scenario for all parties. It is unfortunate that the U.S. Congress has not taken action to establish an orderly restructuring of our debt that is positive for both the commonwealth and for the creditors. Such congressional action does not represent a cost to U.S. taxpayers. Unfortunately, Congress, which responds to Wall Street lobbyists, has ignored the crisis in Puerto Rico and, in turn, has preferred that the island’s 3.5 million American citizens and its creditors slide into chaos,” García Padilla stated Friday.
“The people of Puerto Rico deserve swift and decisive action from Congress,” the governor concluded.
With lobbying efforts set to resume this month on Capitol Hill, the commonwealth government is once again banking on congressional action during the first semester of the new year, particularly securing access to Chapter 9 of the U.S. Bankruptcy Code, which would allow Puerto Rico to restructure more than $20 billion of debt held by its public corporations. The island’s total public debt towers at more than $70 billion.
One measure introduced by a group of Democratic lawmakers sought to establish a short-term stay on creditor lawsuits against Puerto Rico until March 31 — U.S. House Speaker Paul Ryan’s self-imposed deadline for the lower chamber to address the island’s fiscal issue. After failing to secure passage before year’s end, it remains to be seen if the measure would be brought back to the table once Congress reconvenes this month.
The administration is seeking to avoid additional defaults amid a debt-service schedule that becomes steeper during the summer. The commonwealth faces more than $1.5 billion in payments July 1, the first day of fiscal 2017.
Photo: Puerto Rico Gov. Alejandro García Padilla
Executive Editor Philipe Schoene contributed to this report.