What are creditors demanding in their lawsuits against the government?

SAN JUAN – With the end of Promesa’s stay on litigation May 1, various types of creditors decided not to wait and filed several lawsuits against the government of Puerto Rico.

Currently, four new actions were filed against the government and the fiscal control board. Meanwhile, Ambac–a municipal-bond insurer–also sued the U.S. Treasury for certain Infrastructure Financing Authority (Prifa) bonds and whose payment is guaranteed by revenues from the rum cover-over program that the island receives from the federal government.

These lawsuits are in addition to more than 10 already filed by creditors since the beginning of 2016 and which the court suspended because of Promesa’s stay. These litigations would resume when the mechanism expires unless the board files restructuring cases under the protection of a judge, as allowed by Title III of the federal law. The latter would restore the stay against collection actions by creditors.

GOv. Ricardo Rosselló (Juan J. Rodríguez/CB)

Gov. Ricardo Rosselló (Juan J. Rodríguez/CB)

The following is a list of some of the claims by the creditor groups that sued the government of Puerto Rico on Tuesday.

Aurelius et al. v. Government of Puerto Rico

A group of hedge funds–which includes Aurelius, Autonomy and Monarch–sued in a New York court, demanding that the government pay nearly $243 million in general obligation (GO) debt service it hasn’t covered, plus interest. The plaintiffs own $1.4 billion in GOs issued by the government in 2014. Read the lawsuit.

Ambac v. Government of Puerto Rico (I)

The Sales Tax Financing Corp. (Cofina by its Spanish acronym) bond insurer asked the Federal District Court in San Juan to invalidate the certified fiscal plan and the recently signed House Bill 938. They claim that both are unconstitutional and in violation of Promesa. Ambac is trying to prevent the government from using pledged sales & use tax (IVU by its Spanish acronym) funds that guarantee the payment of Cofina’s debt. Read the lawsuit.

Ambac v. Government of Puerto Rico (II)

In addition to the fiscal plan and H.B. 938, the insurer also asked the federal court in Puerto Rico to overrule the moratorium orders and legislation in effect since the end of 2015. Through them, the government withholds, or claws back, certain revenue sources–highway tolls; license fees and taxes on tobacco products, gasoline and hotel rooms, among others–that guarantee payment of the debt incurred by Prifa and the Highways & Transportation and Convention Center District authorities. They claim the orders are also unconstitutional and contrary with Promesa. Ambac intends to prevent the government from using these funds for other uses than the payment of the debts they guarantee. Read the lawsuit.

Ambac v. U.S. Treasury (III)

Finally, Ambac also sued the U.S. Treasury in a Washington, D.C., court, in relation to the money transferred to the Puerto Rican government from the federal excise tax on the sale of rum. The local government has clawed back this source of revenue, which guarantees the payment of certain Prifa bonds, through one of the moratorium orders. The insurer requests that Treasury stops transferring these funds to the government until the clawback dispute is resolved. As an alternative, it seeks that a receiver retain these funds in a separate account. Read the lawsuit.

Rodríguez-Perelló et al. v. Government of Puerto Rico

A coalition of institutional and hedge funds that own Cofina senior bonds sued the government in Puerto Rico’s federal court. The plaintiffs request that the court declare invalid the fiscal plan and H.B. 938, as being contrary to Promesa and for impairing the rights of these bondholders. They also demand that the fiscal plan be amended so it doesn’t affect Cofina, as well as declaring an event of default–whose remedy includes accelerating the payment of Cofina’s outstanding debt. They also request the court to prohibit the government from acting in a way that affects the transfer of the pledged IVU portion that guarantees the payment of this debt. In sum, these creditors seek that the government not include Cofina’s debt, nor the IVU money that guarantees it, as part of Puerto Rico’s debt restructuring plan. Read the lawsuit.




La Fortaleza Vetoes Key Fiscal Bill

SAN JUAN — On Monday, Gov. Alejandro García Padilla vetoed a legislative bill that seeks to fund partial payments of Puerto Rico’s general obligation (GO) debt due this fiscal year.

La Fortaleza stated that the legislation was vetoed because it “earmarks for future debt payments monies that are necessary to ensure the operation of government,” including the main funding source for the troubled Highways & Transportation Authority. It adds that the measure promotes fiscal practices that are inconsistent with the administration’s public policy.

What’s more, García Padilla believes it would be “premature” to allocate “a significant amount of resources” to debt repayment, when Promesa’s fiscal oversight board has yet to determine what the Puerto Rico government should keep paying its creditors while undertaking debt-restructuring efforts.

The governor had until Monday, Aug. 1, to sign or veto the measure, which was approved by the island’s legislature during the end of the last legislative session.

House Bill 2959 also included language that incorporated Popular Democratic Party (PDP) gubernatorial candidate David Bernier’s plan to improve the Puerto Rico government’s severely underfunded retirement systems.

To that end, the governor left the door open for a special legislative session, during which new legislation can be presented to address the island’s public retirement systems. La Fortaleza stated that it is important to ensure adequate funding for these, as required by Promesa.

HB 2959 sought to take over certain “clawed back” revenue—funds taken from certain public entities that had been earmarked to repay their debts—or some $450 million, to try to at least cover interest payments due on constitutionally protected debt during fiscal 2017, which began July 1. About $370 million would go to cover GO bonds and $80 million for Public Building Authority debt that is guaranteed by Puerto Rico’s full faith and credit.

PDP Rep. Rafael Hernández, who authored language related to the use of clawbacks to service GO debt, forewarned last week to Caribbean Business that if the bill failed to be signed by the governor, it could bring about problems to the Puerto Rico government, both legally and politically.

From a legal standpoint, Hernández argues that the island’s government must allocate funds to service GO debt, even if only to cover interest, as not doing so could further impair contractual obligations between the Puerto Rico government and its creditors, as well as the island’s ability to regain access to capital markets.

Rafael Tito Hernandez House Treasury Committee

Rep. Rafael Hernández

Politically, the governor’s decision could spark yet another battle within the PDP, with only a few months before the island’s general election, as the bill includes compromises among the House, Senate and the party’s gubernatorial candidate.

As previously reported by this newspaper, La Fortaleza has had concerns with HB 2959 since it was approved a month ago, particularly over the use of clawed-back funds.

“At this moment, we are in no position to specify the particular use that would be given to these funds,” Santana said two weeks ago in response to Caribbean Business’ inquiries over the use of the $269 million clawed back to date. The García Padilla administration says that money has yet to be used.

Under its Constitution, Puerto Rico could take control of these previously pledged revenue streams, but only to pay its GOs if no other resources are available.

“Due to the passage of Promesa [Puerto Rico Oversight, Management & Economic Stability Act] on June 30, we are currently evaluating the new juridical framework upon which the commonwealth should address its obligations with creditors,” Santana added at the time, while acknowledging that the administration has discussed whether to use these funds to cover GO debt payments.

Under Section 405, Promesa states that the federal fiscal-control board, in its sole discretion, would determine if Puerto Rico is able to make interest payments during the federal law’s moratorium period. However, it is unclear who would make that call in the time before the board is constituted.

Of the $269 million collected since January, $143 million remains corralled at the troubled Government Development Bank, which continues to operate under cash outflow restrictions. The remaining $146 million sits in a “clawback account” held in a private bank.

HB 2959 would have taken over some of the clawed-back revenue streams—only those that were pledged to service debt—and “redirect” them to a special fund that would service Puerto Rico’s constitutionally protected GO debt.




Governor Still Mulling Future of Fiscal Bills

After quickly signing the fiscal-year 2017 budget into law, Gov. Alejandro García Padilla is still evaluating various bills approved late last month, at the end of the legislative session, as lawmakers continued to nudge their own fixes to Puerto Rico’s fiscal woes.

One such piece of legislation is House Bill 2959, which takes over “clawed back” revenue—funds taken from certain public entities that had been earmarked to repay their debts—and appropriates some $450 million of these funds for paying general-obligation (GO) debt due this fiscal year.

Also pending are HB 2964, which repeats the $400 tax revenue anticipation notes from public corporations—so-called internal TRANs—issued last fiscal year, and HB 2962, which allows a 40% cut to the central government’s debt with the Government Development Bank.

“We are evaluating [HB 2959] and various other bills that we received during the end of the legislative session. Once we finish that process, the governor will make a decision,” La Fortaleza Chief of Staff Grace Santana told this newspaper on July 8. The governor has until the end of the month to sign or veto these bills.

garcia padilla grace cesar

Gov. Alejandro García Padilla, Chief of Staff Grace Santana and Justice Secretary César Miranda

At least two sources told Caribbean Business there are some concerns in La Fortaleza with the bill, particularly over the use of clawback funds. The measure also seeks to prop up contributions to the island’s underfunded pension systems.

“At this moment, we are in no position to specify the particular use that would be given to these funds,” Santana said in response to Caribbean Business’ inquiries over the use of the $269 million that has been clawed back to date.

Under its Constitution, Puerto Rico can take control of these previously pledged revenue streams, but only to pay its GOs if no other resources are available.

“Due to the passage of Promesa [Puerto Rico Oversight, Management & Economic Stability Act] on June 30, we are currently evaluating the new juridical framework upon which the commonwealth should address its obligations with creditors,” Santana added, while acknowledging that the administration has discussed whether to use these funds to partially cover GO debt payments due July 1.

Under Section 405, Promesa states that the federal fiscal-control board, in its sole discretion, would determine if Puerto Rico is able to make interest payments during the federal law’s moratorium period. However, it is unclear who would make that call in the time before the board is constituted.

Two weeks ago, the commonwealth defaulted on about $800 million due on constitutionally protected debt, including roughly $350 million in interest; clawback funds were not used to cover these payments. When the measure was first triggered late last year, about $169 million was used to cover a $400 million payment due Jan. 2 on commonwealth-guaranteed debt.

Of the $269 million collected since January, $143 million remains corralled at the troubled Government Development Bank (GDB), which continues to operate under cash outflow restrictions. The remaining $146 million sits in a “clawback account” held in a private bank.




Puerto Rico Defaults on Over $800M of Constitutionally Protected Debt

SAN JUAN – Puerto Rico will cover only about $150 million of the $958 million in constitutionally guaranteed debt it owes Friday, according to the government. In all, it will miss $911 million out of the $2 billion in debt-service payments due.

“When I became governor, Puerto Rico was a colony of Wall Street,” Gov. Alejandro García Padilla told reporters Friday in La Fortaleza.

“There should be no doubt today that I have chosen to protect the Puerto Rican people, and that we have been telling the truth all along,” he added, noting how the recently released audited financial statements confirm the island’s fiscal woes.

Of the $958 million that carry the island’s full faith and credit, the government will miss $780 million worth of general obligations (GOs), while paying about $150 million of the $178 million owed in Public Buildings Authority (PBA) bonds.

The island’s fiscal authorities stated earlier Friday that “over $800 million” in debt guaranteed by the commonwealth will still be owed July 1. They added that the administration won’t use “clawed back” revenues to pay for this debt, and instead will leave the roughly $150 million on a separate account, while its final use has yet to be determined.

Meanwhile, municipal bond-insurance companies cover some of the payments that will be missed, meaning these would need to pick up the tab for any defaulted debt they insure.

As for the rest of the payments due Friday, or about $1 billion corresponding to several public entities, the government will meet almost all of them in full, although mostly by siphoning the entities’ debt-service reserves held by their trustees.

All things said, the commonwealth will default on roughly half of the $1.9 billion due July 1, including the $780 million in GOs and $77 million tied to the Infrastructure Financing Authority (AFI by its Spanish acronym).

On Thursday, García Padilla signed executive orders authorizing the government to miss payments on its constitutionally guaranteed debt, while also declaring moratoriums on certain obligations of the Highways & Transportation Authority (HTA), Convention Center District Authority, the Public Employees Retirement System, the Industrial Development Co. (Pridco) and the University of Puerto Rico (UPR).

Despite the executive orders, partial payments will still be made, although coming from debt-service funds already held by a trustee. In addition, the orders seek to preserve cash and protect against potential legal action by creditors.

“Today, with these measures and [the Puerto Rico Oversight, Management and Economic Stability Act’s (Promesa)] federal restructuring authority in place, the Commonwealth is finally in a position to return to prosperity,” reads a government statement, adding that the administration seeks to avoid a government shutdown.

“Today, Puerto Rico is protected against creditors’ actions, and the lawsuits they have already filed or could file in the future,” the governor said in reference to the recently enacted federal legislation.

Puerto Rico’s fiscal situation on June 30, the last day of fiscal year 2016, was “dire,” with only about $200 million in cash in its operating account, according to the government’s statement. It warns it would need to continue taking emergency fiscal measures over the next six months to avoid depleting its liquidity.  

Even after the implementation of the latest fiscal orders, the administration warned about how dangerously low the government’s liquidity position will be through the rest of the year, according to the statement.

GDB Chairwoman Melba Acosta, Secretary of State Víctor Suárez, Gov. Alejandro García Padilla and Chief of Staff Grace Santana

GDB President Melba Acosta, Secretary of State Víctor Suárez, Gov. Alejandro García Padilla and Chief of Staff Grace Santana (Inter News Service)

No Use Yet For Clawbacks 

Meanwhile, roughly $150 million will continue to sit on a “clawback account” held in a private bank. These are monies taken since late last year from some of the island’s public entities originally pledged to pay for their debt. An additional $140 million in clawed back monies are deposited at the GDB, according to the government’s audited statements.

When asked by Caribbean Business whether the $140 million held at the GDB are liquid, officials conceded they are not, while they fall under cash-outflow restrictions in place at the troubled bank. 

Under its constitution, Puerto Rico can take control of previously pledged revenues, but only to service its constitutionally guaranteed debt if no other monies are available.

After triggering the executive clawback orders Nov. 30, the administration used about $160 million of these revenues to meet more than $400 million in payments due Jan. 2 on commonwealth-guaranteed debt.

Justice Secretary César Miranda has argued that a court could allow Puerto Rico, under its constitutional police power, to prioritize essential services to residents. “But if you ask me at this moment, and I’m pressed to give you an answer, I would have to say those monies [clawbacks] would need to go to pay constitutional debt,” he conceded to Caribbean Business a few months ago, during the presentation of the island’s debt-moratorium legislation.

“Even if the Commonwealth were to devote every last penny in [its operational account] and the Clawback Account to debt service on July 1, it would still owe holders of the public debt hundreds of millions of dollars,” reads Friday’s statement, which confirmed that the administration won’t use those funds to pay constitutionally protected debt due July 1.




Judge Fusté Sends Lawsuit Filed by Monolines to Judge Besosa

SAN JUAN – Federal Judge José A. Fusté has abstained from presiding the civil lawsuits filed by Assured Guaranty Corp., Ambac Assurance Corp. and Financial Guaranty Insurance Co. against the commonwealth because of opinions he made about the “clawback” mechanism in the recent Wal-Mart ruling, in which he declared a hike in the alternative minimum tax (AMT) unconstitutional.

In an order issued last week, Fusté, who is retiring in June, said that during the Wal-Mart case, the subject of the “clawback” cases was mentioned and anyone examining the Wal-Mart opinion could believe he has an opinion made on the issue of clawbacks, or tapping into a revenue stream destined to cover the payment of other debt.

“Therefore, we asked Judge Francisco Besosa to take over these two cases, and he has agreed to do so. The undersigned has no mind made up about the ‘clawback’ issue but, out of an abundance of caution, we have determined to pass these two cases on,” Fusté stated in the order.

Bond insurers Ambac Assurance and Assured Guaranty filed lawsuits against the commonwealth on Jan. 7 for redirecting pledged revenues, known as clawbacks, to pay constitutionally guaranteed debt service, a move the monolines deem illegal and invalid under the U.S. Constitution. The lawsuit came hours after Puerto Rico’s government failed to pay roughly $36 million in interest due Jan. 4 on Infrastructure Financing Authority (Prifa) debt.

A few weeks later, another lawsuit over Puerto Rico’s debt default was filed by Financial Guaranty Insurance Co. over the clawback mechanism. The U.S. District Court in Puerto Rico decided to join the two lawsuits to save time and money.

FGIC sued Puerto Rico for diverting $164 million in revenue streams meant to pay the island’s debt.

The cases were the first against Puerto Rico since Gov. Alejandro García Padilla called the island’s $70 billion debt load “unpayable” last June. The governor said the only way to afford to pay debt backed by Puerto Rico’s constitution was to redirect or claw back revenue earmarked for debt at other agencies.

In late March, Fusté rule against the new tax that Puerto Rico had tried to impose on Wal-Mart, which had argued that the hike in the AMT would make up more than 100 percent of its profits.

Fusté had said it gave him no pleasure to throw out the tax because of the commonwealth’s fiscal crisis, but that Puerto Rico’s crisis was not an excuse “to take revenue that it’s not entitled to, to pay for essential services.” If Wal-Mart had paid on time and waited to get a refund through the usual channels, it would most likely have never seen the money again, he added.

As part of the opinion, Fusté noted the government has been cannibalizing itself at an astonishing rate because of the clawbacks. “The government has withheld $309 million in appropriations from public entities like the University of Puerto Rico and the Highway and Transportation Authority. Puerto Rico clawed back some $163 million from the accounts of its agencies, but then immediately spent it on a January 2016 public-debt obligation,” he said.  

It is evident that the government has been running out of new public resources to consume, he said. “The depth of the Commonwealth’s insolvency can perhaps be measured by the shortsightedness of some of its liquidity measures. Due to the connection between the Commonwealth’s timely payment of its general-obligation bond debt, which is backed by the full faith and credit of the government, and its future access to bond markets, it would seem natural to protect, as long as possible, Puerto Rico’s ability to pay that debt. We have already passed that point.

“The Commonwealth used to set aside $93.1 million each month into a separate account so there would be sufficient money to cover its semiannual payments of matured general-obligation bonds. Puerto Rico then enacted a law to halt those set-asides, freeing up the $93.1 million per month to use on other bills and obligations in the short term, while setting itself up for failure in the long term because the Commonwealth still needs to make its general-obligation debt payments. Because it is no longer saving up enough money, Puerto Rico is now projected to default on its June 2016 general-obligation bond payment of $700 million. That would mark the first step of a disorderly default,” Fusté added.

 




Insurer FGIC Sues Puerto Rico Government

SAN JUAN – Financial Guaranty Insurance Co. (FGIC) has sued the government in federal court, challenging the constitutionality of the recently issued executive order by Gov. Alejandro García Padilla to enable the so-called “clawback” mechanism because they are preempted by the U.S. Constitution and federal law.

FGIC, which insures $1.2 billion in commonwealth debt, also sought an injunction urging the government from taking any action pursuant to the clawback, or tapping into a revenue stream destined to cover the payment of other debt, contained in Section 8 of the commonwealth’s Constitution.

The executive order calls for retaining or transferring certain taxes and revenues pledged to secure the payment of bonds from the Highway and Transportation Authority, the Convention Center District and the Infrastructure Financing Authority. Those funds were used to pay commonwealth guaranteed debt, such as general obligation bonds, as provided by the constitution.

FGIC likened the clawback to a bankruptcy law because the government is adjusting its debt. 

“The United States Constitution and federal law preclude the Commonwealth from enacting a bankruptcy law that adjusts the debts of its instrumentalities and public entities and binds non-consenting creditors. The United States Congress has enacted a federal bankruptcy code, expressly providing that States have no power to enact their own laws for adjusting debts,” the document reads.

FGIC contends the executive order is unconstitutional because they violate its constitutionally protected property interests and contractual rights.

The firm says it is exposed to $164 million of the pledged funds and has suffered injuries. The order also constitutes a misappropriation and diversion of secured bondholder collateral and will deprive the firm of its property interests and due process, the complaint says.

This is the second lawsuit filed by an insurance company that challenges the clawbacks. Earlier this month, Assured Guaranty Corp. and Ambac Assurance Corp. also sued the government.

By Eva Lloréns Vélez