Bondholders filed to sue the Commonwealth of Puerto Rico on Tuesday after a year-long moratorium on lawsuits expired at midnight on Monday. This could lead to the initiation of a bankruptcy-like procedure for the Caribbean island to restructure its $70 billion debt.
According to the Associated Press, those who bought $16 billion worth of bonds backed by Puerto Rico’s sales tax said in the lawsuit that a plan by the government to cut its debt was unconstitutional. The suit comes as the administration of Gov. Ricardo Rosselo failed to negotiate a deal with bondholders after the May 1 deadline. Puerto Rico Chief of Staff William Villafane said his government prefers to reach an agreement with bondholders, but if negotiations fail, a bankruptcy-like process could be an option, the Associated Press said.
The debt-cutting process, known as Title III, is an in-court procedure that the country may be forced into. Beyond its debt, Puerto Rico has a 45% poverty rate and near-insolvent public health and pension systems, according to Reuters.
The lawsuit, filed in federal court in San Juan, accuses the government of impairing contractual rights of so-called COFINA bondholders, the debt for which is backed by sales tax revenues, and violating the due process clause of the U.S. Constitution. The expiration of the litigation freeze is expected to open the floodgates of others seeking to sue the Puerto Rican government in an attempt to block Rosselo’s plan to impose drastic repayment cuts, Reuters said.
The island is operating under a federal oversight board that has the ability to seek creditor losses through Title III, according to Bloomberg. The restructuring would be the largest in the $3.8 trillion municipal bond market. With the moratorium lifted, Puerto Rico may face adverse rulings on cases already filed. The island offered holders of general-obligation bonds as much as 77 cents on the dollar and proposed as much as 58 cents on the dollar for its sales tax debt as of a week ago, but the offer was rejected, Bloomberg said.
– Adam Fusco, associate editor