Bondholders sue Puerto Rico over moratorium law

by | Jun 28, 2016 | Courts, Headlines | Comments

A group of bondholders are suing Puerto Rico’s Government Development Bank over the Debt Moratorium and Financial Recovery Act, after claiming it gives preferential treatment to local creditors. The group, which is made up of hedge funds Brigade, Claren road and Fir Tree, updated their preexisting lawsuit in response to new amendments to the original debt restructuring law passed in April.

The amendments went into effect in May, and the group says they “skewed the playing field by changing the rules of the game.” They said this created an uneven playing field and noted that prioritizing the rights of select creditors violates U.S. and Puerto Rican law.

However, Governor Alejandro Garcia Padilla said the lawsuit could have negative consequences for Puerto Rico as a whole. According to Garcia Padilla, the lawsuit could stop the flow of essential services such as police, teachers and nurses on the island. The governor further defended the law, saying it remains as the only viable option Puerto Rico has to restructure their debt as Congress excluded Puerto Rico from the bankruptcy code in 1984.

“If the commonwealth cannot proceed with its intention to restructure the debt in an organized manner, chaotic litigation will ensue and the courts can take control of the limited resources of the government and make them available to the interests of the Wall Street funds,” the Governor said in a written statement.

“We are not going to close the government to pay a considerable profit to the hedge funds, who bought the bonds at a big discount after the crisis began.”

The bank is currently $3.75 billion in debt, and missed the majority of a $422 million debt payment that was due May 1.

[graphiq id=”9Zor4dG10rz” title=”Puerto Rico’s Public Debt” width=”600″ height=”532″ url=”https://w.graphiq.com/w/9Zor4dG10rz” link=”https://www.graphiq.com/wlp/9Zor4dG10rz” link_text=”Puerto Rico’s Public Debt | Graphiq” ]

Still, this amount seems meager in the face of the island’s greater ongoing debt crisis. To date, the island is carrying a $70 billion burden of debt.