HAMILTON, Bermuda -- Bond insurance subsidiaries of Assured Guaranty Ltd (together with its subsidiaries, Assured Guaranty) filed suit on Thursday challenging the constitutionality of the revenue clawback instituted by Puerto Rico late last year.
Assured Guaranty believes the clawback of revenues pledged to bond issues violates the US Constitution by illegally interfering with Assured Guaranty’s contractual rights.
In December, Puerto Rico announced that, in order to fund its general obligation (GO) bond payments, it would begin clawing back revenues pledged to other bond issues, including those of the Puerto Rico Highways and Transportation Authority (HTA), the Puerto Rico Convention Center District Authority (PRCCDA) and the Puerto Rico Infrastructure Financing Authority (PRIFA).
This action has caused a payment default on PRIFA bonds and will eventually force the HTA and PRCCDA bonds into default. Such actions threaten the credibility of Puerto Rico and its government, undermine the markets' confidence in Puerto Rico's willingness to honour its financial commitments and limit its opportunities for economic recovery.
According to Puerto Rico’s constitution and its related laws, the clawback may be implemented only to pay GO debt and only in the event that Puerto Rico’s revenues are insufficient to pay the debt. Puerto Rico may not clawback pledged revenues to pay any of its other obligations. Debt service on Puerto Rico’s GO bonds amounts to only approximately 19% of Puerto Rico’s annual budgeted revenues. The clawback is not necessary to make GO bond payments. Yet Puerto Rico has invoked an option that not only ignores its own laws, but is unconstitutional and impairs the contracts entered into by holders and insurers of HTA, PRCCDA, and PRIFA debt.
“The Commonwealth has not satisfied the preconditions to the clawback and is disregarding the priorities of its own constitution and the rule of the law. This confiscation of revenues pledged to bondholders is illegal. We encourage the Commonwealth to instead focus on measures that build market credibility and develop specific fiscal plans to address its critical issues, including revenue collection," said Dominic Frederico, president and chief executive officer of Assured Guaranty.
“These actions stand in contrast to the consensual agreement that we and other creditors recently reached with Puerto Rico’s electric utility, PREPA. That agreement provides for the reform and efficient recapitalization of PREPA. Assured Guaranty continues to stand ready to work constructively with Puerto Rico in a consensual way, in keeping with our long term support of the island,” Frederico added.
The suit, filed on Thursday in United States District Court for the District of Puerto Rico, names Governor Alejandro Garcia Padilla and a host of government officials and seeks to have the clawback declared unconstitutional and asks the court to issue an injunction against its implementation.