Bond insurer files complaint against Moratorium Act
National Public Finance Guarantee Corporation, an indirect subsidiary of MBIA Inc., filed a complaint Wednesday challenging the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, asking the court to invalidate it.
The complaint filed at the U.S. District Court in San Juan seeks a declaration from the court that the Moratorium Act is preempted by federal bankruptcy law and violates the U.S. Constitution in several respects.
“Similar to the Puerto Rico Public Corporation Debt Enforcement and Recovery Act that was adopted by Puerto Rico and found to be invalid by the U.S. Supreme Court, National believes that the Moratorium Act is likewise invalid,” said Bill Fallon, National’s CEO.
“With this action, National is seeking to protect the right to priority of payments established under the Puerto Rico Constitution on the General Obligation bonds that it insures, and the liens on properties that secure other National-insured bonds, which the Commonwealth has already invaded under claimed authority of the Moratorium Act,” Fallon added.
National insures approximately $3.84 billion of the debt issued by the Commonwealth and its credit-issuing agencies. The insurance that the company provides “enabled the Commonwealth and many of its instrumentalities to borrow funds on more favorable terms than they otherwise could have.”
In exchange, National obtained rights including first-priority payment on the Commonwealth’s General Obligation debt and security interests in told revenues pledged to the repayment of Puerto Rico Highways and Transportation Authority bonds.
The company claims that the Moratorium Act is pre-empted by federal law and violates the U.S. Constitution in a number of ways, including because it takes National’s property interests without compensation and “substantially impairs’ its contract rights.
Under the Moratorium Act, the governor of Puerto Rico can declare a “state of emergency” for troubled credit-issuing entities.
National claims Gov. Alejandro García-Padilla has already issued an executive order expropriating bondholders’ security interest in HTA toll revenues, “and Commonwealth officials have stated openly that the Commonwealth may use the Moratorium Act to block upcoming payments on GO debt,” according to the causes of action explained in the lawsuit.
National supports Congressional efforts to pass legislation to address Puerto Rico’s financial difficulties, it raised a flag over the content of the “Puerto Rico Oversight, Management and Economic Stability Act,” or PROMESA, expected to pass in the U.S. Senate before July 1, when the commonwealth has some $2 billion due in debt service payments.
“The current draft of the PROMESA legislation approved by the House of Representatives does not foreclose continued reliance on the unconstitutional Moratorium Act. National continues to stand ready to work constructively with its Puerto Rico credits to address their financial and liquidity challenges, and National is also determined to take reasonable and necessary actions to protect its rights as the insurer of these bonds,” Fallon said.