The Tumultuous Year Ahead
Not one week into the new year and the first cannon blasts have already been fired in the epic battle for the restructuring of Puerto Rico’s $70 billion debt. The first salvo—a warning shot—came just before midnight on Jan. 7 in a complaint for injunctive relief filed by bond insurance companies Ambac Assurance Corp. and Assured Guaranty. The lawsuit is but a first legal maneuver that seeks an injunction against the “clawback” that Gov. Alejandro García Padilla set in motion through an executive order signed on Nov. 30, 2015.
The lawsuit alleges that the clawback, a mechanism that taps into revenue streams that were originally destined for other debt, violates the Fifth Amendment of the U.S. Constitution. Although the complaint recognizes that the clawback doesn’t violate Puerto Rico’s Constitution, which was enabled by Act 600 in 1952, the plaintiff s allege the commonwealth government illegally resorted to the move without exhausting every possible option on the fiscal level.
The governor’s executive order comes on the heels of a string of events from a playbook that could be titled, “How to Wreck Negotiations.” First came the petition for a writ of cerciorari by the U.S. Supreme Court in the case of the Debt Compliance & Recovery Act, which had been deemed unenforceable by the First Circuit Court of Appeals in Boston. A writ of cerciorari would order a lower court to hand over its record of the case. The financial community found it somewhat off-putting that the petition came on the same day that Puerto Rico was going to market with a bond deal for the Puerto Rico Aqueduct & Sewer Authority—there’s nothing like insisting on bankruptcy to kill your access to capital markets.
Then came the string of actions leading up to this winter of discontent—Gov. Alejandro García Padilla’s presentation before the National Press Club in Washington, D.C., where he boldly stated that he would probably have no choice but to default on about $1 billion due on Jan. 4. The governor’s saber rattling comes off as charlatan rhetoric because Puerto Rico allegedly paid 96% of its debt, leaving nearly $35 million unpaid. The governor claims to have drawn a line in the sand on behalf of the people of Puerto Rico. The García Padilla administration’s faux default served only to further diminish Puerto Rico’s credibility.
Sources in creditor camps insist that the symbolic shortfall is but the latest provocation by Puerto Rico’s restructuring brigades in a strategy that intends to bait creditors into a fight that will lead to massive litigation, ultimately forcing Congress to act on Puerto Rico’s behalf. The press release issued by La Fortaleza on the heels of the lawsuit seemingly affirmed what the creditors denounce. Straight to the chase, Garcia Padilla alleged that this action would provoke an “uncertain scenario for all parties…. 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 governor said.
“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,” he added.
A strategy that counts on Congress to act on Puerto Rico’s behalf in extending Chapter 9 bankruptcy protections to the commonwealth is very risky. Several sources on Capitol Hill have told Caribbean Business that it isn’t likely the island will be obtaining any help during an election year.