In the days since Assured Guaranty filed a lawsuit jointly with monoline insurer Ambac against the commonwealth of Puerto Rico over the constitutionality of revenue clawbacks, the parties have been defending their corners via public statements.
Last Friday, Gov. García-Padilla said given that there is no legal framework to address Puerto Rico’s debt disputes “the Commonwealth and its creditors will soon face the opposite of due process and rule of law,” inciting Dominic Frederico, president of Assured Guaranty Ltd. to say Monday that it is “disappointing that the governor continues to focus his efforts on chapter 9 bankruptcy access rather than initiating solutions that promote a consensual resolution of the island’s fiscal, economic and structural problems.”
“It is ironic that the Governor’s remarks feign concern about the absence of a legal framework, due process and the rule of law when it was his illegal action, ordering the confiscation of pledged revenues through clawbacks, that violates the constitutional rights of the holders and insurers of bonds issued by Puerto Rico’s Highways and Transportation Authority, Infrastructure Financing Agency, and Convention Center District Authority,” he said.
In the lawsuit filed last Thursday at the U.S. District Court for the District of Puerto Rico, Ambac and Assured said they insure or reinsure some $7.9 billion in Commonwealth debt and its public corporations, including the authorities involved in the clawbacks. The government has diverted about $163 million so far in funds pledged to the agencies to secure debt payments, for what the insurer claims are “unconstitutional uses.”
“As had been widely predicted and forewarned, the Commonwealth of Puerto Rico has been sued by Wall Street insurers. This latest development will force a race to the courthouse and with no legal framework to handle this impending litigation crisis both the Commonwealth and its creditors will soon face the opposite of due process and rule of law,” García-Padilla said in a statement released Friday.
“This reality causes great uncertainty for all parties involved. The most dismaying part is that Congress could have easily prevented the coming litigation pandemonium at no cost to the U.S. taxpayers. But, in answering to Wall Street lobbyists, Congress has ignored Puerto Rico’s crisis and instead allowed the Island’s 3.5 million American citizens and their creditors enter into chaos,” the governor said.
In response, Frederico argued that the federal forum is the appropriate venue to resolve the clawback litigation, “and we have confidence in the men and women who administer the judicial system that is the true backbone of the rule of law — a longstanding legal framework used to enforce contracts under the U.S. Constitution and a well-established body of contract law built through centuries of jurisprudence,” Frederico said.
The monoline insurance executive further blasted the government for “instead of doing everything within their power to legally manage their debt, reform their government and rebuild their economy, the government of Puerto Rico has adopted a strategy to deliberately promote a ‘crisis narrative’ intended to gain retroactive access to bankruptcy from the U.S. Congress. This strategy has worsened Puerto Rico’s situation, eroded its credibility and delayed prospects for recovery.”
García-Padilla urged Congress to prevent the so-called “humanitarian crisis” from spinning out of control by immediately enacting The Puerto Rico Emergency Financial Stability Act of 2015 introduced in December by several U.S. lawmakers.
“Swift action from our congressional leaders is necessary and what the people of Puerto Rico deserve.”
But Frederico said the retroactive application of Chapter 9 to wipe away obligations to long-term investors and partners of Puerto Rico will not fix the Commonwealth’s problems and will instead incentivize a continuation of bloated spending, corruption and contempt of law with no accountability.
“The Commonwealth should instead focus on developing consensual solutions that address the island’s asserted liquidity issues and implementing necessary reforms to promote transparency and economic growth,” he said.
“Assured Guaranty stands ready to continue working on those solutions, but will take all steps necessary to ensure that existing law is correctly applied to the debt it insures,” Frederico said. “We believe this will help protect the public’s confidence in the municipal bond market, which is threatened by Puerto Rico’s reversal of its willingness to acknowledge its obligations.”