Bondholders sue over Puerto Rico debt-moratorium law

San Juan, Puerto Rico / AP

Holders of bonds from Puerto Rico’s Government Development Bank are suing to challenge aspects of a debt-moratorium law that island officials say is crucial to maintaining essential services as the U.S. territory struggles under a nearly $70 billion debt load.
The amended federal lawsuit filed late Friday in the U.S. District Court in San Juan names Puerto Rico’s governor and treasury secretary as well as an unidentified bank receiver. It argues that amendments to the law prioritize the rights of certain creditors at the expense of others in violation of U.S. and Puerto Rican law.
Gov. Alejandro Garcia Padilla said the lawsuit’s challenge of the Debt Moratorium and Financial Recovery Act could affect the commonwealth’s ability to have police in the streets, teachers in the classrooms and nurses in hospitals. He said because Congress excluded Puerto Rico from the bankruptcy code in 1984 without any explanation, and the federal courts have impeded past attempts to create a local bankruptcy law, the act is the commonwealth’s only option to restructure its debt.
“If the commonwealth cannot proceed with its intention to restructure the debt in an organized manner, chaotic litigation will ensue and the courts can take control of the limited resources of the government and make them available to the interests of the Wall street funds,” the governor said in a written statement Saturday evening. “We are not going to close the government to pay a considerable profit to the hedge funds, who bought the bonds at a big discount after the crisis began.”
The Ad Hoc Group behind the lawsuit comprises five investment funds that hold $900 million of the GDB’s nearly $4 billion in outstanding debt.
The GDB defaulted on the bulk of a $423 million payment due May 1, but also announced a tentative debt-restructuring deal with the group that would offer it a recovery rate of about 50 cents on the dollar.
“Notwithstanding the Commonwealth’s unconstitutional actions, the members of the Ad Hoc Group understand that the Commonwealth faces significant challenges and want to continue working with GDB, as they have for over a year, to achieve a fair, equitable and mutually beneficial restructuring,” the bondholders said in a statement.
Other creditors are also challenging an executive order issued this year by Garcia Padilla to “claw back” revenue supporting different bonds and use the money for to pay for essential services and government debt obligations.
And this month, bond insurer Ambac Assurance Corp. filed suit to seek the appointment of a receiver at the Puerto Rico Highways & Transportation Authority, charging that the government was illegally taking money from the public corporation to pay for other debts.
The House Committee on Natural Resources will hold a markup session next Tuesday and Wednesday on legislation to address Puerto Rico’s fiscal crisis. The measure would create an oversight board to ensure that Puerto Rico begins running balanced budgets and would also have the power to authorize the restructuring of existing debt.
The U.S. Supreme Court is also reviewing decisions that overturned the local bankruptcy law.