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Wall Street Starts to Put Puerto Rico in Its Legal Crosshairs

Puerto Rico, near insolvency, is now in the legal crosshairs of creditors who want to be paid what they're owed.

GettyImages-499611772
GettyImages-499611772

The fight to force Puerto Rico to pony up $72 billion in unpayable debt has shifted to American courts.

Late Thursday, Assured Guaranty and Ambac Financial, two insurers of Puerto Rican debt, sued the commonwealth after it defaulted Jan. 4 on a $36 million debt payment. The two companies asked a judge to declare that Puerto Rico violated the U.S. Constitution when it diverted $163 million from revenue meant to pay down debt at the territory's highway, infrastructure, and other public agencies. They also want to prevent Puerto Rico from doing the same in the future.

To pay some of what they owed at the start of 2016, Puerto Rican officials were forced to raid revenues from the island’s Highways and Transportation Authority, the Infrastructure Financing Authority, and the Convention Center District Authority bonds. This means Puerto Rican Gov. Alejandro García Padilla, who last summer admitted the commonwealth is broke, had to rob Peter to pay Paul -- essentially, raid the island’s few sources of revenue to pay back creditors.

The fight to force Puerto Rico to pony up $72 billion in unpayable debt has shifted to American courts.

Late Thursday, Assured Guaranty and Ambac Financial, two insurers of Puerto Rican debt, sued the commonwealth after it defaulted Jan. 4 on a $36 million debt payment. The two companies asked a judge to declare that Puerto Rico violated the U.S. Constitution when it diverted $163 million from revenue meant to pay down debt at the territory’s highway, infrastructure, and other public agencies. They also want to prevent Puerto Rico from doing the same in the future.

To pay some of what they owed at the start of 2016, Puerto Rican officials were forced to raid revenues from the island’s Highways and Transportation Authority, the Infrastructure Financing Authority, and the Convention Center District Authority bonds. This means Puerto Rican Gov. Alejandro García Padilla, who last summer admitted the commonwealth is broke, had to rob Peter to pay Paul — essentially, raid the island’s few sources of revenue to pay back creditors.

The lawsuit is the first filed dealing with Puerto Rico’s unserviceable debt. García Padilla and the White House want Congress to give San Juan bankruptcy protection, something U.S. cities like Detroit have used when they ran out of cash. But under current U.S. law, as a commonwealth, Puerto Rico is not eligible for the Chapter 9 safeguard.

Bills in the House and Senate would change this. But so far, there’s strong opposition from Republicans, including Senate Judiciary Chairman Chuck Grassley (R-Iowa), and the bills have stalled.

Without legal protections, the island will be forced to negotiate with those who hold its debt, including Franklin Templeton and OppenheimerFunds, which together own about $5 billion in Puerto Rican bonds. These lenders could give Puerto Rico a so-called “haircut,” or accept less than what they are owed. To date, most private lenders have refused to do so.

In a statement Friday, García Padilla recognized the lawsuit “will force a race to the courthouse” by his creditors. He again called on Congress to give Puerto Rico “broad restructuring authority.”

His calls will likely continue to fall on deaf ears. For now, Puerto Rico remains on its own.

Photo credit: Spencer Platt/Getty Images

See Also: Is It Time for the U.S. to Issue a Digital Dollar?

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