Assured Guaranty and Ambac Financial are the first two bond issuers to take legal action against Puerto Rico following its debt default at the start of January.
They allege the island violates the Constitution by redirecting $163 million in revenues to its general obligation debt in the lawsuit filed with the U.S. Federal Court of Puerto Rico Thursday.
The territory, which currently faces around $72 billion in debt, failed to make its Jan. 1 $37 million obligation on bond interest payments issued by the Infrastructure Financing Agency and Public Finance Corporation.
During an appearance on CNBC, Puerto Rico Gov. Alejandro Garcia Padilla said the island’s Department of Justice is preparing itself for lawsuits, adding litigation will be costly and could prevent it from making payments.
The governor lobbied lawmakers to grant the territory Chapter 9 bankruptcy rights to restructure its debt. Critics say the island’s financial predicament follows years of uncontrolled spending and its government offers no plan to fix the root of the problem.
“Over the last several months, we have attempted to engage the commonwealth in consensual conversations toward finding amicable solutions for their asserted liquidity issues, only to be rebuffed,” Ambac CEO Nader Tavakoli said in a statement. “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.”
During a Senate hearing in early December, Sen. Chuck Grassley said the island issued its bonds knowing Chapter 9 was not and option and it would be unfair to retroactively change the policy at the expense of investors if other options exist.
“Most recently, the commonwealth unlawfully diverted tax revenues collected by the U.S. government, which are collected for the specific purpose of supporting PRIFA bonds, in order to finance the government’s general accounts,” Tavakoli added. “We remain hopeful that the commonwealth will abandon these illegal tactics, and turn instead toward good faith negotiations aimed at solutions instead of confrontation.”
House Speaker Paul Ryan said finding a solution to Puerto Rico’s debt crisis will be on the agenda in the first quarter of 2016.
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Photo by USACE HQ
Pablo Vazquez-Ruiz, resident engineer overseeing construction at Portugues Dam, shows the dam’s spillway to Puerto Rico Governor Alejandro Garcia Padilla following a dedication ceremony celebrating completion of construction on Feb. 5. The $386 million dam is the first roller-compacted concrete dam built by the U.S. Army Corps of Engineers.