Municipal bond insurance companies Ambac Assurance Corp. (Ambac) and Assured Guaranty Corp. (Assured) are suing Puerto Rico in the wake of its failure to make $37 million in bond payments that were due on January 1. The U.S territory defaulted on paying certain bonds in order to have the funds to repay $355 million owed to holders of Puerto Rico general obligation debts. In the process, it diverted $163 million from revenue streams that should have gone to the island’s government agencies.
Ambac and Assured insure approximately $1.1 billion and almost $1.5 billion, respectively, of the debt still owed to government agencies. The insurance companies contend that the island’s decision to use tax money, which should have gone toward payments on the bonds that they insure, to pay the other bond obligations due is unconstitutional. Assured also said that this legally interferes with the insurer’s contractual rights and violates the U.S. Constitution’s Fifth and Fourth Amendments, as well as Article I, Section 10.
Because of the default, the two insurance companies are collectively compelled to pay $10.7 million on insurance policies. Their lawsuit seeks to stop Puerto Rico from completing the payment clawbacks.
According to the two insurers, clawback authority is only applicable when no other funds are available to pay debt. They say that the island has yet to prove this to be true.
Ambac and Assured are also claiming that the territory is wrongfully using the clawbacks to pay for government services while diverting the collateral of bond holders and that this violates the US Constitution, too. The two insurers are also suing Puerto Rico Governor Alejandro García Padilla and Government Development Bank President Melba Acosta.
Garcia Padilla said that the lawsuit would have never occurred if the territory was allowed to engage in debt-workout overseen by a court. Puerto Rico is not allowed to file for Chapter 11 bankruptcy protection and the courts have blocked its efforts to restructure the island’s debt.
This month, the U.S. Supreme Court will hear an appeal looking to revive The Recovery Act, which is legislation the territory has tried to pass to help with that restructuring. The island owes over $70B in debt to investors.
While this is all playing out in the courts, Bloomberg is reporting that Puerto Rico officials are looking to meet with creditors this week. The territory is expected to present them with a proposal on how to restructure its debt. Puerto Rico has to pay back another $2 billion of the debt it owes by July 1 or risk yet another default.
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Assured Guaranty, Ambac sue Puerto Rico over debt default, clawback provisions, Reuters, January 8, 2015
Puerto Rico Said to Start Lender Talks as Soon as Wednesday, Bloomberg, January 12, 2015