Puerto Rico’s fiscal and debt crisis moved into a new phase marked by riots, active lawsuits, and biting political attacks.

“Sometimes it is darkest before the dawn,” said Chapman Strategic Advisors managing director and municipal bankruptcy expert James Spiotto.

Inmate brigades joined in cleaning up damage in San Juan yesterday after a demonstration Monday led to vandalism.
Inmate brigades joined in cleaning up damage in San Juan yesterday after a demonstration Monday led to vandalism.

As crews repaired damages left by Monday's protests in San Juan's banking district against the austerity being imposed on the island under the Puerto Rico Oversight, Management and Economic Stability Act, the law's stay on debt-related lawsuits ended on Tuesday. That prompted at least two new lawsuits by bondholders, as the stay was lifted from at least 13 other suits that had already been filed.

Holders of senior bonds from the Puerto Rico Sales Tax Financing Corp. (COFINA) sued Gov. Ricardo Rosselló and the rest of the government in the U.S. District Court for Puerto Rico. In negotiations in April, Puerto Rico’s Fiscal Agency and Financial Advisory Authority violated COFINA’s dedicated sales tax stream, the suit claims. In late April FAFAA went further and called for money in COFINA to be diverted to the General Fund.

The plaintiffs are seeking 11 declaratory judgments, two writs of mandamus, and three permanent injunctions. In essence, they want various steps taken to be sure that their bonds are paid in full and not threatened.

In the same court Ambac Assurance Corp., which insures about $1.3 billion in COFINA senior bonds, also filed suit to protect the bonds. One source said that Ambac had also filed a suit against Bank of New York Mellon, the bonds’ trustee, in federal District Court for the Southern District of New York. This couldn’t be immediately confirmed.

A “litigation meltdown is not a solution” to the Puerto Rico debt problem, Spiotto told The Bond Buyer. “You may have all the rights in the world, but if the [debtor] party doesn’t survive, thrive, your ability to get repaid is severely diminished.”

Litigation is the least likely means of reaching a long-term solution, since the debtor is going to be hit by substantial attorney’s fees, Spiotto said.

Even the Puerto Rico Oversight Board initiating Title III, which would consolidate all Puerto Rico debt cases into a single bankruptcy process, wouldn’t be a good solution, he said. There could be a very long road of appeals to Title III and parties could fight its results indirectly.

What is needed is a real “time out,” Spiotto said. All parties including all creditors groups must ultimately reach a realistic deal among themselves. It may mean that creditors may have to reinvest. In the end everyone would get more, he said.

Others were also opposed to the resumption of the suits, though they emphasized the value of Title III.

“The power to comprehensively restructure 100 per cent of its debt is the reason why I voted ‘yes’ on [PROMESA] last year,” said U.S. Rep. Nydia Velázquez (D.-N.Y.). “Inconceivably, today, May 2, 2017, the island is on the same path as it was prior to the enactment of the law. This is unconscionable. It is imperative the board use this powerful tool and vote to file for a Title III proceeding immediately.”

In late April, Puerto Rico House Minority Leader Eduardo Bhatia said, “The only positive thing about the PROMESA law was access to Chapter III. Nobel laureate [Joseph] Stiglitz and other economists have reaffirmed the urgency of activating it. To delay it will lengthen and deepen the fall of our economy.”

In the background of the litigation is Puerto Rico’s constitution. Article VI, Section 8 states, “In case the available revenues including surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall first be paid, and other disbursements shall thereafter be made in accordance with the order of priorities established by law.” PROMESA’s Title III would supersede this.

Without Title III, it is possible a judge will order the shutdown of Puerto Rico’s government to divert money to pay off the commonwealth’s already defaulted general obligation debt.

There was no word from the board on Tuesday as to its plans.

A creditor lawyer said he believed the board would file for Title III in May. Rosselló has been seeking a consensual solution through PROMESA Title VI until this past weekend. This has slowed the board’s move to filing for Title III, he guessed.

In the meantime things have become tenser on the island. A San Juan demonstration against the board’s austerity measures on Monday turned violent, with extensive damage to a Banco Popular office building’s windows, fires being lit, and car windows being smashed. As of Tuesday morning the police had arrested 17 connected with the previous day’s actions. They promised many more arrests.

San Juan mayor Carmen Yulín Cruz released a letter saying the May 1 demonstration was “to express the repudiation of the vast majority of the country of the abusive policies of [Rosselló’s] government that has decided to turn its backs on our people.” Yulín Cruz is a member of the Popular Democratic Party, the principal opposition party to Rosselló’s New Progressive Party.

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