Hedge Funds Holding Puerto Rico General Obligation Bonds File Lawsuit

A number of hedge funds with Puerto Rico general obligation bonds want a court to stop the U.S. territory from using its sales-tax revenue to pay back other debt. Those hedge funds say that such an action is a violation of the Commonwealth’s constitution.

To date, the Commonwealth owes nearly $13 billion of general obligation bonds. Under its constitution, Puerto Rico is required to pay back its general obligation bonds before paying off other expenses. According to the plaintiffs, part of the territory’s’ sales tax revenue is supposed to go toward that repayment.

The plaintiffs sued Puerto Rico Governor Alejandro Garcia Padilla to stop the territory from moving money away from bondholders, which they say violates the new federal law concerning Puerto Rico, called PROMESA. The hedge funds submitted their amended complaint last week, in which they added the Puerto Rico Sales Tax Financing Corp., commonly called COFINA, as a defendant. The plaintiffs include entities under the management of Aurelius Capital Management, Covalent Partners, Autonomy Capital, Monarch Alternative Capital, FCO Advisors, and Stone Lion Capital Partners. 

In July of this year, Puerto Rico defaulted on $780 million of general obligation bond payments that were due. As the Commonwealth continues to pay COFINA bondholders on schedule and in full, the plaintiffs are arguing that Puerto Rico must abide by its constitution by paying back its general bonds, too.  Meantime, the newly appointed federal board, which is tasked with supervising the territory’s finances, is asking for more time to decide whether to delay certain lawsuits that have been brought against Puerto Rico.

Board members want until October 21 to submit their position regarding a legal stay that halts lawsuits brought by creditors that are seeking to get their money back.  Creditors and others want this stay, which runs through the middle of February 2017, to be lifted. Still, there are others who believe that in order to recover from its financial woes, Puerto Rico needs a temporary break from such cases so it can restructure its $70 billion of debt.

At Shepherd Smith Edwards and Kantas, LLP, our Puerto Rico investment attorneys and bond fraud lawyers represent investors seeking to recover their losses. We work with clients on the mainland and the islands of Puerto Rico.  Unfortunately, many investors were inappropriately sold Puerto Rico closed-end bonds by brokers from  Banco Popular, UBS Puerto Rico (UBS-PR), Banco Santander (SAN) and others.  Contact us today.

Hedge Funds Holding Puerto Rico GOs Sue Over Sales-Tax Bonds, Bloomberg, October 7, 2016

Hedge Funds Sue Puerto Rico, NBC News, July 21, 2016

Hedge Funds Sue Puerto Rico and Its Governor, July 25, 2016