After the May 1st deadline, Puerto Rico is facing a historical moment. A lot has been said about the events that were going to unfold after the end of the stay on the debt that was established with PROMESA (see debt restructuring). Now, that day has arrived, and the future of Puerto Rico will be in the hands of judges of the federal court.
The morning after the end of the stay, COFINA bondholders, an entity that was created in 2006 with the implementation of a sales tax, decided to present a lawsuit in the district court of San Juan against Puerto Rico, for the payment of their part. They are claiming that the contract between them and the government was breached and that the government has to pay their share, which by law is backed by the sales tax. COFINA bondholders are demanding the government not to continue the practice of including sales tax revenues into Puerto Rico’s general funds. For them, this practice goes against what was contractually established.
Currently, COFINA’s debt is around $16 billion, in the next ten years, the government needs to pay close to $700 million. This amount goes against what was established by the Fiscal Oversight Board, which approved a fiscal plan that took into consideration the payment of only $800 million of the $35 billion that needs to be paid in the next ten years.
Other lawsuits that were presented in San Juan are from insurance companies that have to pay creditors for their losses. Companies such as Ambac Assurance Corp., has filed two lawsuits against Puerto Rico’s government and Fiscal Oversight Board, in which “accuses the government of illegally retaining $300 million owed to bondholders.”1 In addition, they demand the loss of $52 million that have been paid in insurance claim.2
Ambac looks to stop the implementation of Title III of PROMESA, which gives Puerto Rico a bankruptcy-like procedure to restructure its debt, and to annul the fiscal plan that was approved by the Fiscal Oversight Board. The insurance company considers that the fiscal plan approved by the FOB does not go in accordance to what is established in PROMESA. For them, the fiscal plan is illegal because it does not follow Puerto Rico’s Constitution, which establishes a priority of payment.
Another lawsuit filed by Ambac in Washington D.C., demands US Treasury Department to place a lien on Puerto Rican rum taxes. For Ambac, “Puerto Rico has improperly diverted away from bondholders.”3
In the meantime, there is expectation that the FOB will submit a petition for Title III. In a statement, Congresswoman Nydia M. Velázquez, urged the FOB to implement Title III; if not, creditors will have the opportunity to claim government assets, which may, as a result, have a greater impact on the Puerto Rican people.
According to the Secretary of Public Affairs of Puerto Rico’s Governor, Ramón Rosario, the government is trying to continue negotiation with creditors, and if there is no other alternative, they will support the implementation of Title III.4 In the end, the FOB is who determines if Title III will be implemented, which needs to have a majority vote of at least five members. The upcoming weeks are crucial for Puerto Rico. We will have to see if the FOB finally files for Title III or if creditors will continue filing lawsuits against the government. The floodgates have been opened, and the battle between creditors and government has just begun.
1Joanisabel González, “Consumadas las primeras demandas contra Puerto Rico,” http://www.elnuevodia.com/negocios/economia/nota/consumadaslasprimerasde...
2Associated Press, “Puerto Rico Hit With First of Several Expected Lawsuits from Bondholders,” http://www.nbcnews.com/news/latino/puerto-rico-hit-first-several-expecte...
3Nick Brown, “Sales tax creditors kick off deluge of lawsuits against Puerto Rico,” https://www.reuters.com/article/us-puertorico-debt-lawsuit-idUSKBN17Y0G3
4NotiUno, “Confirman gobierno de Puerto Rico va camino a la quiebra,” https://notiuno.com/confirman-gobierno-de-puerto-rico-va-camino-la-quiebra/