Two bond insurance subsidiaries of Assured Guaranty Ltd. have made some $205 million in debt service payments to holders of insured General Obligation and other bonds on which Puerto Rico and certain of its entities defaulted on July 1, the company announced Thursday.
The Bermuda-based company also covered payments missed by the Puerto Rico Public Buildings Authority, which defaulted on payments and is insured by Assured Guaranty Municipal Corp. (AGM) and Assured Guaranty Corp. (AGC), and the total gross and net claim payments by Assured Guaranty.
“As always, investors owning Puerto Rico-related bonds insured by Assured Guaranty will continue to receive uninterrupted full and timely payment of scheduled principal and interest in accordance with the terms of Assured Guaranty’s insurance policies,” the company said in a statement.
The bond trustee, paying agent or, in the case of secondary market policies, custodian files the claim with Assured Guaranty on behalf of the bondholders, and therefore no action is required on the part of investors to receive their scheduled debt service payments, it said.
Assured Guaranty makes the claim payment directly to the relevant bond trustee, paying agent or custodian, who then distributes the funds in the same manner as when paid by the issuer.
Under its standard municipal bond insurance policy, Assured Guaranty makes its payment no later than one business day after the claim is received, but not before the payment due date.
“It is regrettable that Puerto Rico has chosen to violate its constitution by ignoring the senior payment priority securing the Commonwealth’s GO bonds. The Puerto Rico constitution unambiguously states that the Commonwealth’s GO debt is to be paid before all other expenditures, and no funds may be applied to other obligations until the GO debt has been fully paid,” the company stated.
“The default on all the GO bond payments continues the pattern of bad faith and reckless disregard for the law that has characterized the current administration. Budgets recently proposed by both the Puerto Rico administration and the Puerto Rico assembly have referenced available monies for at least partial payments of the GO bonds,” the company further stated.
The decision to default in full on GO debt payments appears opportunistic in the wake of the recent enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which has a provision staying creditor lawsuits, it added.
“Throughout the last week of June, in an effort to facilitate the administrative aspects of making timely payments to insured investors, Assured Guaranty attempted, to no avail, to determine from Puerto Rico which Assured Guaranty insured credits would have claims for July 1 payments,” it stated.
Additionally, Puerto Rico’s clawbacks, beginning in December 2015, of revenues pledged to certain non-GO debt would have been lawful and permissible only when all other revenue sources for GO payments had been exhausted, a condition that was not met at the time the clawbacks were initiated and that remains unmet
And insofar as clawbacks were constitutionally permitted, any funds clawed back may only be applied to pay GO debt. Puerto Rico has said that through June 30, 2016 it clawed back $453 million, of which it applied $164 million to GO bond payments due in January 2016.
Of the $289 million balance, none was applied to the July 1, 2016 GO bond payments, $143 million is reportedly being held at the Government Development Bank where it is essentially frozen, and $146 million is reportedly being held at a commercial bank without disclosure of how such monies will be applied.
“The Commonwealth’s disregard for the rule of law has disastrous ramifications for Puerto Rico’s credibility and future access to the capital markets. It will increase the future cost of borrowing to fund the infrastructure it needs to revive its economy, and the ultimate victims will be the people of Puerto Rico, who have been badly served by multiple administrations,” Assured said.