Hedge Funds Sue The U.S. Government Over Puerto Rico Bonds

A group of hedge funds, including Oaktree Capital Management LP and Glendon Capital Management LP, has filed a lawsuit against the federal government in the U.S. Court of Federal Claims. The hedge fund group are Puerto Rico bondholders who could suffer losses from bonds that were issued in 2008 to help the island’s retirement system, the Puerto Rico Employment Retirement System (ERS), stay afloat. Unfortunately, beginning in 2013, the ERS investments faltered, leading the pension system toward bankruptcy.

The hedge funds’ complaint comes after PROMESA, the federal oversight board that was appointed to help the island of Puerto Rico address its $73 billion of debt, placed the Commonwealth’s biggest public retirement fund under bankruptcy protection to help restructure $3 billion in pension obligation bonds (commonly called POBs).

The ERS’s bonds can be paid for by pension contributions that public employers make toward the retirements of their employees. The hedge fund plaintiffs thought that these payments would go to them first. However, in June, the federal oversight board approved legislation to transfer these employer contributions beyond the pension system and away from these creditors. Now, the hedge funds want a court order determining that the move was illegal. They are seeking $3.1 billion in principal plus interest on the ERS bonds.

Other Puerto Rico Bondholders Continue to Fight for Repayment
The hedge fund plaintiffs in the securities lawsuit against the federal government are not the only ones wanting repayment on their bonds. Earlier this week in Puerto Rico, federal judge Laura Taylor Swain approved an agreement between a group of ERS bondholders and the Commonwealth’s government. Under the deal, the island agreed to put aside more than $90 million over the next 3 ½ months and pay about $14 million a month in interest payments through October, as well as fulfill a debt payment that was due on July 1.

While all of this wrangling is going on, hedge funds that are holding Puerto Rico general obligation bonds (GO bonds) are still trying to get paid before the owners of other Puerto Rico debt. In court documents, those hedge funds recently disclosed how much of these securities that they respectively own. They are adamant that their securities are guaranteed by the territory’s constitution.

According to Bloomberg, here are the amount of GO bonds owed by the hedge funds:

· Aurelius Capital Management LP holds $470.9 million of GO bonds
· Stone Lion LP holds $310 million of GO bonds
· Autonomy Capital LP holds $937.6 million of GO bonds
· Senator Investment Group holds $254.7 million of GO bonds
· FCO Advisors LP holds $422 million of GO bonds
· Monarch Alternative Capital LP holds $585 million of GO bonds
· Franklin Mutual Advisers LC owns $294 million of GO bonds

The hedge funds want the island’s sales tax revenue to go toward paying back the general obligation debt, instead of holders of other Puerto Rico debt, including those holding specific sales tax bonds (commonly called COFINA bonds) that were contractually guaranteed to be paid first.

Puerto Rico Bond Fraud Cases
Our Puerto Rico bond fraud lawyers and closed-end bond fraud attorneys are hard at work helping investors to try and recoup the investment losses they sustained when the island’s securities failed. Contact Shepherd Smith Edwards and Kantas, LLP today to schedule your free case consultation. We represent investors in Puerto Rico and on the mainland. If you believe that you may have grounds for a Puerto Rico securities fraud claim against UBS Puerto Rico (UBS-PR), Barclays (BARC), Banco Popular, Santander Securities (SAN), or another broker-dealer, contacts us today.

Puerto Rico’s Bondholders File First Suit Against Uncle Sam, The Wall Street Journal, July 20, 2017

Court green lights deal between Puerto Rico gov’t, Retirement System bondholders, Caribbean News, July 17, 2017

Hedge Funds Disclose Just How Many Puerto Rico Bonds They Own, Bloomberg, July 13, 2017