FGIC Sues Puerto Rico Over Bond Payment Default

A third bond insurer is now suing Puerto Rico over the way its government officials diverted tax money to fulfill certain bond payments that were due while defaulting on other payments. The latest plaintiff is Financial Guaranty Insurance Company (FGIC). Its complaint has been consolidated with a lawsuit brought by Ambac Assurance Corporation (Ambac) and Assured Guaranty Corp. (Assured) that makes similar allegations.

FGIC contends that government officials violated the U.S. Constitution when they diverted over $164 million to pay off some of the Commonwealth’s general obligation debt. As a result of the diversion, Puerto Rico defaulted on $37 million in interest on bonds and FGIC says that because of this it had to pay over $6 million in claims.

The fund diversion lets the territory avoid default on general obligation bonds, which, under its own Constitution, are the priority in terms of making payments. However, according to the three insurance companies, the island expects to make about $9 billion in the fiscal year that ends in June and this goes beyond its debt-service costs. The insurance companies do not believe that money had to be redirected away from the government agencies.

Puerto Rico owes over $70 billion in debt. Recently, U.S. Treasury Secretary Jack Lew pressed Congress to pass legislation to help the beleaguered territory. Lew visited the island on Wednesday.

The Commonwealth needs federal laws that will let Puerto Rico restructure its debt. In fact, the Puerto Rico Electrical Authority (PREPA) needed lawmakers to approve legislation by the end of this week. Such a law would have let it close a deal it reached with bondholders, banks, and insurers to lower its debt in what would be the largest restructuring to take place in the municipal bond market. Critics of the deal, however, including local consumer and business advocates, fear that such an agreement would grant the government-run utility too much authority to increase Puerto Rico’s already high electrical rates.

PREPA owes bondholders $8.1 billion. PREPA also owes banks about $90 million. The electrical authority has already acknowledged that it will not be able to pay the $1.13 billion due to creditors in the beginning of July unless an agreement is put into effect. Among the bondholders holding PREPA’s bonds that have already signed the accord are Goldman Sachs Group (GS), OppenheimerFunds Inc. ( OPY), Franklin Advisers Inc., DE Shaw & CO., Marathon Asset Management LLP, Knighthead Capital Management LLC, and Blue Mountain Capital Management LLC.

Shepherd Smith Edwards and Kantas, LTD LLP
Our Puerto Rico municipal bond fraud lawyers represent investors on the island and in the United States. We are here to help our clients recoup their losses from investing in Puerto Rico proprietary bond funds and close-end bond funds. Unfortunately, despite ample warning signs of the problems the island is now facing, broker-dealers such as UBS Puerto Rico (UBS), Banco Popular, Banco Santander (SAN), Oriental Bank and others recommended these securities to investors, even though these individuals could not afford to take the risks the investments in Puerto Rico carried. Many brokers were aware that for these investors to get involved in Puerto Rico bonds was unsuitable, yet they continued to steer them in that direction. Some even encouraged investors to borrow so they could invest even more money in the bonds.

At Shepherd Smith Edwards and Kantas, LTD LLP, we are here to help our clients recoup these losses.

Puerto Rico Sued by Third Bond Insurer to Halt Revenue Raid, Bloomberg, January 21, 2015