Insurers of Puerto Rican bonds sued the U.S. commonwealth late Thursday over its recent debt default, the first lawsuit against the island since its governor called its $70 billion debt load "unpayable" last June.
The lawsuit by Assured Guaranty and Ambac Financial , filed in U.S. federal court in Puerto Rico, asks a judge to declare that Puerto Rico violated the U.S. constitution when it diverted $163 million from revenue streams meant to pay debt at the island's infrastructure, highway and other agencies.
It also looks to block Puerto Rico from executing these so-called clawbacks.
The lawsuit is an opening salvo in what could be a long and expensive court fight over Puerto Rico's efforts to restructure $70 billion in debt. The island lacks access to U.S. bankruptcy protections, and creditors have been resistant to voluntary concessions, making for a messy and unpredictable path to restructuring.
In June, Governor Alejandro Garcia Padilla called the island's debt load "unpayable" and sought concessions from bondholders.
Last month, he said the only way to afford to pay debt backed by Puerto Rico's constitution was to redirect or "claw back" revenues earmarked for debt at other agencies.
The infrastructure authority, PRIFA, missed a $36 million debt payment on Monday as a result of the so-called clawbacks.
The plaintiffs argue clawback authority applies only when there is no other money available to pay debt, which Puerto Rico has not proven is the case. The clawbacks "substantially and unjustifiably impair ... contractual rights," the insurers allege.
They also say Puerto Rico is wrongfully using clawbacks to fund government services, and are diverting bondholders' collateral in violation of the Takings and Due Process clauses of the U.S. constitution.
The complaint names Garcia Padilla, along with Government Development Bank President Melba Acosta, among its defendants. A spokeswoman for Garcia Padilla's office had no immediate comment.
A 45 percent poverty rate and shrinking tax base have helped push Puerto Rico into an economic quagmire. The lawsuit represents the first chance for a judge to assess the island's longstanding claims that it faces a humanitarian crisis and needs help from creditors.
However, the litigation could prove largely symbolic, as sides are expected to put most of their resources into consensual restructuring talks in the coming months.
Ambac insures about $1.1 billion of debt at the clawed-back agencies, while Assured wraps nearly $1.5 billion, according to the lawsuit.