The suit filed in New York by holders of general obligation bonds seeks to invalidate a debt moratorium and fiscal emergency law passed in early April as the island struggles to restructure $70bn in public debt.
While Governor Alejandro García Padilla has not yet implemented a temporary debt moratorium, many speculate he will soon because Puerto Rico is expected to default on a payment of nearly $2bn on 1 July. That amount includes more than $700m in general obligation bonds that are supposed to be guaranteed under the island’s constitution.
The lawsuit said bondholders relied on that key protection when they bought general obligation bonds two years ago.
“Plaintiffs have an absolute right to be paid first among all obligations of the Commonwealth, to be paid in full, and to be paid on time,” the lawsuit states. “When Puerto Rico approached the capital markets in late 2013 to issue the 2014 GO Bonds, Governor Garcia Padilla trumpeted the bonds’ constitutionally guaranteed priority.”
The case was brought by Washington-based Robbins, Russell, Englert, Orseck, Untereiner & Sauber on behalf of several investment groups.
Overall, Puerto Rico has roughly $12.5bn worth of outstanding general obligation bonds, according to the lawsuit.
The lawsuit was filed on the same day that Puerto Rico’s government announced it was ending private talks with bondholders following several failed proposals and counterproposals involving debt payments.
Puerto Rico’s Government Development Bank, which is operating under a state of emergency amid dwindling liquidity, publicly released those proposals, including one presented to bondholders a week ago that officials said was more generous than a previous proposal made in April.
Puerto Rico already faces a couple other debt-related lawsuits as the US Senate prepares to debate a bill called Promesa, already approved by the US House of Representatives, that would implement a federal control board, among other things, to address the island’s soaring debt.
Grace Santana, the governor’s chief of staff, told the Associated Press that the government is reviewing the lawsuit but accused bondholders of refusing to acknowledge the island’s fiscal crisis.
“Puerto Rico has debts it cannot pay,” she said. “This attempt by hedge funds to disrupt the Commonwealth’s ability to keep the lights on and provide essential services for the 3.5 million Americans on the island makes clear that the Senate must act and pass Promesa before July 1.”
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