Insurance companies that guarantee Puerto Rico municipal debt filed a lawsuit challenging the constitutionality of the commonwealth's decision to divert revenue designated for some bonds to pay other creditors.
Ambac Financial Group Inc. and Assured Guaranty Ltd. said the claw back of revenue pledged to bond issues violates the U.S. Constitution by interfering with debt-holders' contractual rights. The suit filed in U.S. District Court in Puerto Rico seeks to have the clawback declared unlawful and asks the court to issue an injunction against implementation, according to a statement.
Puerto Rico Governor Alejandro Garcia Padilla announced in December that the commonwealth would divert the revenue in order to fund its general-obligation debt payments, which have the highest priority under the island's constitution. Puerto Rico defaulted on about $37 million in agency bond payments at the start of the year, saying it would focus on providing essential services as the commonwealth's financial situation worsened.
"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," Nader Tavakoli, chief executive officer of Ambac, said in the statement late Thursday.
The targeted clawback revenues include those of the Puerto Rico Highways and Transportation Authority, the Puerto Rico Convention Center District Authority and the Puerto Rico Infrastructure Financing Authority, known as Prifa. Ambac paid $10.3 million in interest that was due Jan. 1 for the Prifa bonds.
The Prifa default was the second by a Puerto Rico agency. The Public Finance Corp. in August began missing monthly debt- service payments because lawmakers failed to allocate the funds. The PFC also missed a Jan. 1 payment.
In a Dec. 29 letter to the governor and his administration, bond insurers said the commonwealth should return rum-tax revenue to Prifa and end the clawback. The insurers calculate as much as $94 million was redirected before Dec. 1. That's when Garcia Padilla signed an executive order to begin the clawback.
The Highways and Transportation Authority and the Convention Center District Authority said last month that they would use reserve cash to repay investors after Puerto Rico redirected their revenue, according to regulatory filings.
