Puerto Rico bond insurers Ambac and Assured Guaranty joined forces Thursday to object the legality of the revenue clawback recently put in motion by the Commonwealth government. The suit was filed by Ambac in the U.S. District Court for the District of Puerto Rico, with Assured Guaranty Corp. and Assured Guaranty Municipal Corp as co-plaintiffs.
The legal recourse seeks to have the clawback declared unconstitutional. In addition, it asks the Court to issue an injunction against its implementation. The insurers argue that the clawback of revenues pledged to bond issues violates the U.S Constitution by illegally interfering with their contractual rights.
“The Commonwealth has not satisfied the preconditions to the clawback and is disregarding the priorities of its own Constitution and the rule of the law. This confiscation of revenues pledged to bondholders is illegal," said Dominic Frederico, president and chief executive officer of Assured Guaranty. “These actions stand in contrast to the consensual agreement that we and other creditors recently reached with Puerto Rico’s electric utility, PREPA. That agreement provides for the reform and efficient recapitalization of PREPA,” Frederico added.
According to the insurers, the Commonwealth has the right under its constitution to clawback certain revenues to service its GO bond payments, but subject to preconditions. One such precondition is that the 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, Debt service on Puerto Rico’s GO bonds amounts to approximately $1.85 billion or 19% of the Commonwealth’s annual budgeted revenues.
“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,” said Nader Tavakoli, president and chief executive officer of Ambac. “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.
The targeted clawback revenues include those of Puerto Rico Highways and Transportation Authority ("HTA"), the Puerto Rico Convention Center District Authority ("PRCCDA") and the Puerto Rico Infrastructure Financing Authority ("PRIFA"). The implementation of the clawback announced in December contributed to the government's default on January 1, 2016 on $36 million of interest on PRIFA bonds, and will eventually cause a default on HTA and PRCCDA bonds, according to the bond insurers.
After the clawback and subsequent default, Ambac Assurance was hit with a payment of approximately $10 million in claims related to the PRIFA bonds it insures.
Gov. García Padilla foresees "chaos"
For his part, Gov. García Padilla anticipated that the legal action initiated by bond insurers will kick start a race to the courts from creditors clamoring for their respective payments despite the absence of a legal framework to restructure debt.
“Puerto Rico’s creditors will soon face a process in which their claims lack the legal status to be resolved in an organized manner. That creates an uncertain scenario for all parties,” García Padilla said. He blamed Congress for its lack of action regarding Puerto Rico’s inclusion on Chapter 9. “Congress – responding to Wall Street lobbyists – has ignored Puerto Rico’s crisis and instead preferred that the island’s 3.5 million American citizens and its creditors enter into chaos,” he added.
García Padilla called for the approval of the Puerto Rico Emergency Financial Stability Act of 2015 introduced in December by House Democratic Leader Nancy Pelosi, and U.S. Senators Harry Reid, Elizabeth Warren, Richard Blumenthal and Charles “Chuck” Schumer.