For the first time in history, the courts could decide if Puerto Rico has illegally issued debt, after certain primary bondholders of the Puerto Rico Sales Tax Financing Corporation (COFINA, by its Spanish acronym) claimed that the Puerto Rican Government issued debt in violation of the Constitution.
According to a motion submitted by the group of COFINA bondholders before federal Judge Francisco A. Besosa, since March of 2011 Puerto Rico may have issued debt illegally, since, at the time, the Puerto Rican Government had already exhausted its 15% loan margin, as stipulated in the Island’s Constitution. As a result, and according to COFINA’s bondholders, the issue of $3 billion in General Obligations (GO) and others could be considered null.
“By August of 2011, the (central Government’s) obligations were approximately 15.3% of the collection averages. And by the time the 2014 GO bonds were issued in March of 2014 (including said issue), the Government was very much over that cap, with obligations representing approximately 17.5% of the collection average,” states the motion from the COFINA group.
The COFINA group’s allegations came up this weekend, when they requested the federal court to dismiss the lawsuit initiated by Lex Claims, LLC and other investment funds, which are GO bondholders. The Lex Claims suit is the only active one, after Besosa determined that he would see the case's merits, waiving the automatic stay on litigations established by PROMESA.
Asking for the Supreme Court’s Intervention
Likewise—in a move of historic importance—, COFINA bondholders asked Besosa to demand Puerto Rico’s Supreme Court to issue a certification to interpret COFINA’s legality.
The motion presented by the COFINA Ad Hoc group and certain claims by Lex Claims have opened up a can of worms because, for the first time, the courts are questioning the assumptions Puerto Rico has used to issue part of the Island’s outstanding debt, which is estimated at a little over $68 billion.
The move from COFINA’s bondholders was made only hours after Ricardo Rosselló Nevares’s administration seemed to yield to pressure from the Ad Hoc GO group, which has been insisting for months to provide financing to the Governor so as to avoid disruptions in the Government, and which is partly made up of funds that have sued the Island.
This was because, last Friday, the Fiscal Agency and Financial Advisory Authority (FAFAA) issued a joint statement with the group. The communication stated that before starting negotiations among the relevant parties, they would ask Besosa to decide on the Lex Claims controversy on or before April 30. The Government even abandoned the efforts to appeal Besosa’s ruling before the First Circuit Court of Appeals, as a way of opposing the related request the Oversight Board (OB) already made on Puerto Rico’s behalf.
Last July, Lex Claims sued Puerto Rico when former Governor Alejandro García Padilla approved the Emergency Moratorium Act and announced a default on its public debt, including the GO.
At first, Lex asked the federal court to declare this statute as unconstitutional because it overlooked the payment priority that the GO bondholders allegedly have, according to the Constitution. Later, since the Government continued to pay COFINA’s bondholders, Lex Claims amended its lawsuit to have COFINA’s structure declared null. According to the plaintiffs, COFINA is responsible for subtracting Puerto Rico Sales and Use Tax (IVU, by its Spanish acronym) revenues from the General Fund, therefore excluding them from the Government’s “available resources”.
“The preliminary offer and offer documents from 2014 attest to no less than eight instances in which the allocated IVU was not available for the 2014 bonds issue,” the motion establishes.
Similarly, COFINA’s bondholders asked Besosa to dismiss the Lex case, because the solution they are interested in (annulling COFINA) cannot be granted under PROMESA. The plaintiffs, in turn, are lacking in arguments, because they regulate their bond ownership, according to the bond contract for the 2014 GO series, and if any controversies arise, they should be settled in a New York courtroom.
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