Bermuda-based re/insurer Assured Guaranty has filed an adversary complaint challenging what it described as the Commonwealth of Puerto Rico’s illegal diversion of special revenue bond collateral that secures the payment of bonds (PRHTA Bonds) issued by the Puerto Rico Highways and Transportation Authority (PRHTA).
At the start of May the Government of Puerto Rico filed for a form of bankruptcy, asking a US court for legal permission to arrange a complicated plan for making payments to various parties, including bondholders. The process is currently under legal review and expected to be both protracted and contentious.
The adversary complaint was filed by two Assured Guaranty bond insurance subsidiaries, Assured Guaranty Municipal Corp. and Assured Guaranty Corp. in Federal District Court in Puerto Rico seeking (i) a judgment declaring that the application of pledged special revenues to the payment of the PRHTA Bonds is not subject to the Title III automatic stay and that the Commonwealth has violated the special revenue protections provided to the PRHTA Bonds under the Bankruptcy Code; (ii) an injunction enjoining the Commonwealth from taking or causing to be taken any action that would further violate the special revenue protections provided to the PRHTA Bonds under the Bankruptcy Code; and (iii) an injunction ordering the Commonwealth to remit the pledged special revenues securing the PRHTA Bonds in accordance with the terms of the special revenue provisions set forth in the Bankruptcy Code.
Assured Guaranty said that the complaint was filed because the company is seeking to halt the latest in a series of what it described as unconstitutional and unlawful acts undertaken by the Commonwealth (and endorsed by the Financial Oversight and Management Board for Puerto Rico) to manage its financial distress.
In a statement the company said that: “Since November 2015, the Commonwealth has engaged in an ongoing scheme of constitutional and statutory violations, which repudiate the rule of law by diverting special revenue bond collateral from the payment of PRHTA Bonds to other, unauthorised uses. This illegal diversion of special revenue bond collateral not only impairs Assured Guaranty’s contractual rights and takes its property interests, but also violates the special revenue protections of the Bankruptcy Code, which Congress incorporated into Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). These protections guarantee that holders of special revenue bonds, or their insurers, receive the benefit of their bargain by protecting the lien on post-petition special revenues and exempting the application of such revenues from the automatic stay. Finally, this illegal diversion of special revenue bond collateral should prevent the Commonwealth from accomplishing a primary objective of PROMESA, which is the ability to return to the capital markets.
“Irrespective of the Commonwealth’s and Oversight Board’s flagrant repudiation of constitutional and statutory protections provided to the PRHTA Bonds and their unlawful expropriation of special revenue bond collateral, payments to holders of PRHTA Bonds insured by Assured Guaranty will continue to be paid without interruption for the life of the bonds. Assured Guaranty unconditionally and irrevocably guarantees full and timely payment of scheduled debt service, in accordance with the terms of Assured Guaranty’s insurance policies, and upon payment, takes over the rights of the insured bondholders. Assured Guaranty is determined to take reasonable and necessary actions to protect its rights as insurer of PRHTA Bonds.”
Assured Guaranty, Puerto Rico, PRHTA Bonds, Puerto Rico Highways and Transportation Authority, Bermuda, North America