Unsecured creditors challenge 2011 Puerto Rico bond issuance

Committee contests about $1 billion; says insurer Ambac supports suit

SAN JUAN — The Unsecured Creditors Committee (UCC) in Puerto Rico’s bankruptcy-like proceedings is challenging about $1 billion in general obligation bonds (GOs) issued in 2011 that remain outstanding, contending they were underwritten in violation of constitutional debt limits.

In its objection, filed May 21, the UCC said Ambac, which insures billions of dollars in Puerto Rico bonded debt, supports the challenge. The UCC has joined the island’s Financial Oversight and Management Board in challenging the legality of some of the commonwealth’s debt, including $6 billion in GOs issued in 2012 and 2014.

On March 17, 2011, the commonwealth issued $442 million in Public Improvement Refunding Bonds, considered GOs, to repay advances made to the commonwealth under a line of credit from the island’s Government Development Bank (GDB) and to pay interest on the bonds themselves. On July 12, 2011, the commonwealth then issued $304 million aggregate principal amount of Public Improvement Bonds of 2011.

On that same day, the commonwealth also issued $52 million in the aggregate principal amount of Public Improvement Refunding Bonds and $245.9 million in the aggregate principal amount of Public Improvement Refunding Bonds that were issued, among other reasons, to fund termination payments under certain interest rate swap agreements.

“For many years leading up to the Petition Date, the Commonwealth was running a structural deficit, i.e., recurring revenues were insufficient to cover recurring expenses. Rather than balance the budget by raising taxes and/or reducing spending, the Commonwealth borrowed money from GDB and bondholders to fund annual operating expenses and debt service,” the UCC said.

Of the 2011 GOs, about $412.5 million in net proceeds was used to refinance GDB credit lines to finance deficit spending by paying interest on GOs. Some $260 million in net proceeds was used to refund other bonds, “including Commonwealth GO bonds that indirectly financed deficit spending by refunding Commonwealth GO bonds the proceeds of which were used to pay debt service on other Commonwealth GO bonds and by paying a portion of $88 million in advances under a GDB line of credit.”

The commonwealth’s average internal revenue for the prior two fiscal years (2009 and 2010) was $7.32 billion.

“With the issuance of some of GO Bonds, the maximum debt service in any fiscal year (including PBA [Public Buildings Authority] Bond debt service) was $1.1092 billion in 2012, which is more than 15% or 15.2% to be precise of the Commonwealth’s average internal revenues for the prior two fiscal years,” the UCC said, referring to constitutional debt limits.

The UCC and the fiscal board separately claim the PBA is a “sham” structure to divert the Puerto Rico Constitution’s debt limits.

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