SAN JUAN, Puerto Rico – A group of bondholders on Tuesday sued Puerto Rico’s government as debt negotiations fell apart less than two weeks ahead of what would be the largest default in the island’s history.
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 $70 billion in public debt.
While Gov. Alejandro Garcia 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 $2 billion on July 1. That amount includes more than $700 million 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 $12.5 billion 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.
Gov. Alejandro Garcia Padilla said the counterproposals offered only limited short-term liquidity and basically expected Puerto Rico “to roll the dice on future growth while locking into a debt burden that no other U.S. state faces.”
Garcia added that he remains open to further negotiations and stressed that his administration has taken what he called extraordinary measures amid a worsening fiscal crisis.
“For many of these measures, hardworking Puerto Ricans and their families have shouldered the greater portion of the burden,” he said. “We now expect our creditors to step up to the plate and be willing to make sacrifices of their own.”
Puerto Rico already faces a couple other debt-related lawsuits as the U.S. Senate prepares to debate a bill called PROMESA, already approved by the U.S. House of Representatives, that would implement a federal control board, among other things, to address the island’s spiraling debt.
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