NEW YORK (Reuters) - Hours after a deadline to negotiate a debt restructuring passed without a deal, Puerto Rico faced a smattering of lawsuits from financial stakeholders that could ultimately push it into bankruptcy.
Holders of Puerto Rican sales tax-backed debt sued the U.S. territory in the early hours of Tuesday, alleging its debt-cutting plans violate the U.S. Constitution.
Ambac Assurance Corp, which insures $2.2 billion of Puerto Rican debt, filed four separate lawsuits over Puerto Rican debt, including two against the government and another against U.S. Treasury Secretary Steven Mnuchin.
Midnight, from Monday into Tuesday, marked the end of a freeze on creditor litigation under last year’s federal rescue law known as PROMESA. The law was designed to encourage Puerto Rico and its federal financial oversight board to negotiate debt-cutting agreements with creditors.
No deals were reached and the expiration of the freeze opened the way for stakeholders to take Puerto Rico to court, in hopes of blocking Governor Ricardo Rossello’s plan to impose drastic repayment cuts.
With $70 billion in debt, a 45-percent poverty rate and near-insolvent public health and pension systems, a torrent of litigation could force Puerto Rico into a so-called Title III proceeding - an in-court debt-cutting process similar to U.S. bankruptcy.
The first complaint, filed in federal court in San Juan, accuses Puerto Rico’s leadership of impairing contractual rights of so-called COFINA bondholders, whose debt is backed by sales tax revenue, and of trying to take their property in what they say are violations of the due process clause of the U.S. Constitution.
Puerto Rican officials have already imposed austerity measures, including cuts to worker benefits and pensions, and have said debt cuts are needed to spare the island from even more severe cuts to quality of life.
The COFINA plaintiffs - who include a local COFINA holder and hedge funds like Cyrus Capital Partners LP and Tilden Park Capital Management - accuse Puerto Rico, Rossello and other officials of angling to repurpose the tax revenue earmarked to pay COFINA debt.
They cite as evidence a law signed by Rossello on Saturday that would give the government authority to redirect sales tax revenue into Puerto Rico’s general fund as part of a debt restructuring.
The lawsuit asks the court to block Rossello from implementing a blueprint for fiscal turnaround that was approved by the oversight board in March. That plan forecasts the island as having only $800 million a year to pay debt - less than a quarter of what it owes, auguring big haircuts for all bondholders.
Separately, Ambac lodged two complaints against Puerto Rico’s government in San Juan federal court, including among defendants the island’s oversight board and the board’s seven members.
One of the two complaints aims to block not only the fiscal blueprint, but the filing of any Title III bankruptcy based on that blueprint.
“Sovereignty confers great power, but it does not authorize lawlessness,” Ambac’s complaint alleges, adding that the board exacerbated the island’s abuses by “giving its imprimatur to an ongoing scheme ... that can only be called theft.”
Representatives for the Puerto Rican government and the oversight board had no immediate comment.
Ambac also sued Bank of New York Mellon, the trustee for COFINA bonds, in New York state court.
It filed a fourth lawsuit in federal court in Washington, D.C., against the U.S. Treasury Department and Treasury Secretary Mnuchin, demanding a lien on Puerto Rican rum taxes collected by Treasury, which it says Puerto Rico has improperly diverted away from bondholders.
Representatives for the Bank of New York and Treasury Department had no immediate comment.
Filing a Title III bankruptcy would protect the island from lawsuits, and many experts and people involved in talks see bankruptcy as an eventual certainty, though timing is uncertain.