Holders of Puerto Rico general obligation and guaranteed debt from before fiscal year 2012 filed a motion Thursday against the legality of Puerto Rico GO and guaranteed debt issued since then.
The Lawful Constitutional Debt Coalition filed the motion in the Puerto Rico’s central government Title III bankruptcy case in Puerto Rico’s U.S. District Court.
The Puerto Rico Oversight Board filed a challenge to this debt in December. The coalition is challenging the debt on a different legal basis. While the board is saying that because the bonds are illegal they shouldn’t be paid, the coalition isn’t taking a position on bond payment.
The Board is arguing that both $6 billion of GOs and $4 billion of Public Building Authority bonds are invalid because public sector entities’ leases of PBA property are actually “disguised financing transactions” by the government. If those disguised transactions were properly included in Puerto Rico’s total debt, according to the board, the issuances of these bonds from fiscal year 2012 forward exceeded the territory’s constitutional debt limit and therefore were illegal.
The coalition said that the part of the constitution the board is referring to addresses “direct obligations of the commonwealth.” It said that accordingly one cannot include the PBA debt.
Instead, the coalition relies on a lower clause in the same sentence, which that says the central government can’t issue debt if the amount it paid for guaranteed debt in the previous fiscal year was greater than 15% of the average of the revenues in the preceding two fiscal years.
Quinn Emanuel Urquhart & Sullivan Partner Susheel Kirpalani is leading the coalition's legal actions in Puerto Rico's bankruptcy.
Puerto Rico guaranteed the PBA debt and by fiscal year 2012 this part of the constitution was being breached, the coalition stated.
In every lease that Puerto Rico’s central government signed with the PBA, there was a separately paid “debt service rent.” Because of this, the transfer of money by the commonwealth each year to the PBA should be considered to be payments for commonwealth-guaranteed principal and interest, a coalition source said.
The coalition source pointed to the Puerto Rico Oversight, Management, and Economic Stability Act section 201(b)(1), which states: “A fiscal plan developed in this section shall … respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory.”
Since Puerto Rico’s constitution gives the government’s GO and guaranteed debt highest priority for payment and since the part of this debt sold since the start of fiscal year 2012 was sold illegally, the debt held by the coalition should be given highest priority for payment, the coalition source said.
At the AFGI Puerto Rico Bankruptcy Risk Summit, held Tuesday in New York City, several panelists talked about the board’s effort to nullify Puerto Rico’s GO bonds since the start of fiscal 2012.
Puerto Rico's effort to invalidate some of its GOs is undermining its own future borrowing tools, said Hector Negroni, Partner at Fundamental Advisors.
James Spiotto, managing director at Chapman Strategic Advisors, said that in the corporate world if one misrepresents conditions in bond offering documents, “you end up getting the federal government taking over your living conditions for a while.”
On Thursday afternoon the coalition also filed an objection to the board’s request to the court for a delay of the statute of limitations for the board to file challenges to several bonds issued in the last few years and their payment.
It also filed an objection to a filing by the Ad Hoc Group of GO Bondholders concerning the board’s attempt to void bonds issued in the last several years. The Ad Hoc Group’s filing was for a set of procedures to be followed in considering its position and the coalition is objecting to those procedures.
