NEW YORK (Reuters) - Puerto Rico and its federal financial oversight board faced a handful of lawsuits from stakeholders on Tuesday, which could ultimately push the ailing U.S. territory into bankruptcy, and more are expected in the coming days.
The lawsuits, filed just hours after the expiration of a freeze on creditor litigation, include complaints from holders of Puerto Rican sales-tax-backed debt, from general obligation bondholders and from bond insurer Ambac Assurance Corp.
Holders of the sales-tax-backed debt, known as COFINA bondholders, in their lawsuit allege that the island’s debt-cutting plans violate the U.S. Constitution.
The general obligation bondholders, whose debt is guaranteed by the island’s constitution, are demanding payment on $242.5 million of debt defaulted upon since July, and damages and interest of more than $102 million.
And Ambac AMBC.O, which insures $2.2 billion of Puerto Rican bonds, filed four lawsuits, including two against the island's government and another against U.S. Treasury Secretary Steven Mnuchin, seeking a lien on Puerto Rican rum taxes collected by the U.S. Treasury Department.
A spokesman for the Treasury Department did not respond to a request for comment.
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.
Many experts see Title III as inevitable, though timing is uncertain.
“At some point, Puerto Rico might run up against an adverse court ruling it would rather not have,” said Keefe Bruyette & Woods analyst Chas Tyson, who follows Puerto Rico. “I continue to think (bankruptcy) is a when, not an if.”
Puerto Rico got more bad news on Tuesday afternoon, when Fitch Ratings downgraded $3.5 billion of debt issued by water authority PRASA, to “C” from “CC.” The agency said a “restructuring of PRASA’s debt appears imminent or inevitable” under PRASA’s fiscal turnaround plan, approved by Puerto Rico’s oversight board on Friday.
COFINA KICKS IT OFF
The COFINA plaintiffs - who include a local COFINA holder and hedge funds like Cyrus Capital Partners LP and Tilden Park Capital Management - in a lawsuit filed in federal court in Puerto Rico, accuse the U.S. commonwealth, Rossello and other officials of angling to repurpose the tax revenue earmarked to pay COFINA debt, which they say violates the due process clause of the U.S. Constitution.
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.
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.
Puerto Rico’s benchmark 2035 general obligation bond rose modestly on Tuesday in light volume, gaining 0.65 point in price to bid 64.75, according to Thomson Reuters data. 74514LE86=MSRB
Of the lawsuits filed by Ambac, two lodged complaints against Puerto Rico’s government, adding as 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. Ambac filed its various lawsuits in federal courts in Puerto Rico and Washington, D.C., and in New York state court.
Trading in the stocks of the three main insurers of Puerto Rico’s bonds on Tuesday was mixed. Ambac AMBC.O lost 0.42 percent to close at $18.79. Assured Guaranty Ltd AGO.N rose 0.26 percent to $38.02, and MBIA Inc MBI.N fell 1.1 percent to $8.06.
Ambac said in one lawsuit that Puerto Rico’s oversight 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.
Reporting by Nick Brown; Editing by Frances Kerry and Leslie Adler
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