New York-based Ambac Financial Group Inc. on Thursday filed a lawsuit to protect its rights against what it deemed the “illegal” clawback of certain revenue by the Commonwealth put into effect last month.
The company filed the complaint through its subsidiary Ambac Assurance for declaratory and injunctive relief in U.S. District Court for Puerto Rico, with co-plaintiffs Assured Guaranty Corp. and Assured Guaranty Municipal Corp.
This is the first lawsuit on record filed against the Puerto Rico government for activating the clawback provision to divert revenue pledged to the Puerto Rico Highways and Transportation Authority (HTA), the Puerto Rico Convention Center District Authority (PRCCDA) and the Puerto Rico Infrastructure Financing Authority (PRIFA), to pay for other expenses, including constitutionally protected General Obligation bonds.
“Although the Commonwealth of Puerto Rico, under its constitution, has the right to clawback certain revenues to service its GO bond payments, that right is subject to important preconditions,” the company said in a statement issued late Thursday.
One key precondition is that the revenues can only be clawed back if no other revenues or moneys are available to pay the GO bond payments. For fiscal year 2016, the Commonwealth forecasts approximately $9 billion of available resources, which vastly exceeds debt service on the public debt of approximately $1.85 billion, Ambac said.
“Over the last several months, we have attempted to engage the Commonwealth in consensual conversations toward finding amicable solutions for their asserted liquidity issues, only to be rebuffed,” Ambac President Nader Tavakoli said.
“Instead the Commonwealth has committed itself to a ‘scorched earth’ strategy of blaming its fiscal and structural problems on lenders, Congress and others, in an effort to deflect responsibility and obtain retroactive application of bankruptcy laws,” Tavakoli added.
Serious issues have been raised by the Governor himself as to whether the Commonwealth historically misrepresented its financial condition to fool the very lenders it now seeks to punish, he said.
The implementation of the clawback contributed to the government’s default on Jan. 1, 2016 on $36 million of interest on PRIFA bonds, and will eventually cause a default on HTA and PRCCDA bonds, Ambac said.
Ambac Assurance satisfied its obligation to make timely payment on approximately $10 million of claims related to PRIFA bonds it insures.
“Most recently, the Commonwealth unlawfully diverted tax revenues collected by the U.S. government, which are collected for the specific purpose of supporting PRIFA bonds, in order to finance the government’s general accounts,” Tavakoli warned.
“We remain hopeful that the Commonwealth will abandon these illegal tactics, and turn instead toward good faith negotiations aimed at solutions instead of confrontation,” he said.
“While we are optimistic that the government of Puerto Rico will begin to act responsibly, at this time we have no choice but to protect our stakeholders through judicial recourse,” the Ambac chief said.