Hedge funds holding more than $750 million of the debt of Puerto Rico's Government Development Bank revived a
The hedge funds, which had reached a preliminary agreement on a restructuring plan earlier this month, filed their amended complaint late Friday in U.S. District Court of Puerto Rico, asking that portions of the commonwealth's debt payment moratorium law be declared null and void.
The original suit was filed April 4. On April 6 Puerto Rico Gov. Alejandro García Padilla signed Law 21, a law giving him the authority to suspend payments on debt backed by the government, the GDB and other public agencies through January 2017. The law also put a stay on legal challenges to any debt moratoriums.
The governor used this law to institute a freeze on GDB principal payments due on May 2. The GDB paid about $23 million in interest on that date. The GDB reached a deal with local credit unions that held some of the debt due that day. In the deal $33 million in par value would have its maturity pushed back to May 1, 2017 while continuing to pay interest.
In a bigger deal, the hedge funds reached a preliminary agreement for restructuring the debt. Ultimately, the hedge funds would accept "face discount notes" equal to 47% of the original notes' value. The notes would pay 5% interest, though some of that interest would be paid through new notes until fiscal 2020.
As part of the preliminary agreement, the hedge funds said they expected to enter a 30 day forbearance from taking actions against the GDB, according to the amended complaint.
However, on May 5 Puerto Rico adopted a revision of its moratorium law. In what was dubbed Law 40, "The Legislative Assembly of Puerto Rico has once again skewed the playing field by changing the rules of the game and has given every indication that it will continue to do so at its whim in the future," the funds said in the amended complaint.
The hedge funds' filing makes numerous complaints about Law 40, primarily saying that it sets things up so that local depositors and creditors will have better recoveries than non-local depositors and creditors. It "directs the receiver to 'preserve and prioritize the safety, soundness and stability of depository financial institutions and their deposits,'" the amended complaint says of the act. The law says that debts owed to Puerto Rico resident institutional holders of GDB bonds would be preferred over those held by those off-island, even when the bonds would otherwise be considered of the same rank, the complaint claims.
The hedge funds complain that setting up a bridge bank to hold stronger assets, as allowed by the moratorium law, could allow disfavored GDB bondholders to be left in the weak GDB and thus be treated worse financially. The governor is allowed to appoint anyone he or she wishes to be receiver for the GDB, without court supervision of the choice or of the receiver's actions, the funds complain.
The plaintiffs are Brigade Capital Management LLC, Tasman Fund LP, Claren Road Asset Management, Fore Multi Strategy Master Fund, Sola, Ultra Master, Solus Opportunities Fund, and four funds from Fir Tree. The defendants are the GDB, García Padilla, Puerto Rico Secretary of the Treasury Juan Zaragoza G-mez, and a hypothetical "John Doe," possible future receiver of the GDB. The municipalities of San Juan and Carolina are intervenor defendants.
The plaintiffs argue Law 21 and Law 40 violate the Contract and Takings Clauses of the United States Constitution and the Puerto Rico Constitution. The funds say they also violate the Commerce, Bankruptcy, and Supremacy Clauses of the U.S. Constitution, contravene Section 903(1) of the Bankruptcy Code, and unconstitutionally close the doors to the federal courts.
García Padilla responded in a statement that said, "A small group of Wall Street hedge funds and vulture funds yesterday filed a lawsuit in federal court seeking to hinder the provision of services that Puerto Ricans receive from the government. This will affect the ability of the commonwealth to have police on the streets, teachers in schools, and nurses in hospitals."
He continued: "The economy of the island will not survive additional austerity measures and certainly not survive the commonwealth having to close in order to pay billions of dollars in bonds maturing this year. We will vigorously defend our limited legal tools and will not tolerate being placed in a legal-straitjacket."
