The Assured Guaranty Corp vs. Puerto Rico and its Highways and Transportation Authority lawsuit, explained

by | Jun 2, 2017 | Courts | Comments

Puerto Rico and its Highways and Transportation Authority are currently in deep waters. One of the lawsuits currently against Puerto Rico regarding their debt is that of the Highways and Transportation Authority (HTA) against the Assured Guaranty Corp.

A little background first. The Assured Guaranty Corp (AGC) started out in January 1988 as the Capital Reinsurance Company that began operations as a financial guaranty reinsurer. They later changed their name to the Assured Guaranty Corp in 2004, around the same time they went public and were listed on the New York Stock Exchange at the price of $18.00 per common share. Their corporate structure (pictured below) clearly summarizes the current flow of power and business at the AGC.

On December 11, 2015, Dominic J. Frederico, President and Chief Executive Officer of Assured Guaranty Corp, wrote a letter to Counselor Antonio Weiss of the US Treasury Department explaining his disapproval of Mr. Weiss’ remarks on December 9 that the way to solve the Puerto Rico debt crisis was to, “impose a potentially unconstitutional federal restructuring regime for the entirety of the Commonwealth of Puerto Rico’s debt.” Mr. Frederico then goes on to explain the faults of Mr. Weiss’ plan, of which there are several. This letter clearly intended to show that AGC has Puerto Rico’s best interests at heart, or at least are trying to help.

Two bond insurances of AGC made debt service payments to holders of insured general obligation and other bonds that Puerto Rico and some of its agencies defaulted on July 1, 2016. Investors who own Puerto Rico related bonds insured by Assured Guaranty will continue to receive regular payments, in accordance with the terms of Assured Guaranty’s insurance policies. The paying agent files the claim with Assured Guaranty who makes the claim payment to the relevant paying agent then distributes the funds in the same manner as would normally be done. Assured Guaranty Corp issued this statement regarding the default July 2016:

“It is regrettable that Puerto Rico has chosen to violate its constitution by ignoring the senior payment priority securing the Commonwealth’s GO bonds. The Puerto Rico constitution unambiguously states that the Commonwealth’s GO debt is to be paid before all other expenditures, and no funds may be applied to other obligations until the GO debt has been fully paid.

The default on all the GO bond payments continues the pattern of what AGC characterizes as bad faith and reckless disregard for the law. Budgets recently proposed by both the Puerto Rico administration and the Puerto Rican legislative assembly have referenced available monies for at least partial payments of the GO bonds. The decision to default in full on GO debt payments appears opportunistic in the wake of the recent enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which has a provision staying creditor lawsuits. Throughout the last week of June, in an effort to facilitate the administrative aspects of making timely payments to insured investors, Assured Guaranty attempted, to no avail, to determine from Puerto Rico which Assured Guaranty insured credits would have claims for July 1 payments.

Additionally, Puerto Rico’s clawbacks, beginning in December 2015, of revenues pledged to certain non-GO debt would have been lawful and permissible only when all other revenue sources for GO payments had been exhausted, a condition that was not met at the time the clawbacks were initiated and that remains unmet. And insofar as clawbacks were constitutionally permitted, any funds clawed back may only be applied to pay GO debt. Puerto Rico has said that through June 30, 2016 it clawed back $453 million, of which it applied $164 million to GO bond payments due in January 2016. Of the $289 million balance, none was applied to the July 1, 2016 GO bond payments, $143 million is reportedly being held at the Government Development Bank where it is essentially frozen, and $146 million is reportedly being held at a commercial bank without disclosure of how such monies will be applied.”

Despite the historic size of Puerto Rico’s default, Assured Guaranty has said it will continue to work with other creditors, current and future Puerto Rico administrations and the PROMESA oversight board to achieve consensual agreements that respect the constitutional, statutory, contractual and property rights of creditors while also supporting the island’s economic recovery.

Puerto Rico is currently attempting to fix the problem. As stated in the first paragraph, Puerto Rico failed to pay the Commonwealth’s GO debt before all other expenditures.That, in a nutshell, was the initial reason for the lawsuit. The rest of the quoted article goes into detail of what exactly Puerto Rico is doing. Because of the failure to pay the Commonwealth’s GO debt, they are being accused of, by the Assured Guaranty Corp, reckless disregard for the law.

However, Puerto Rico is currently doing all it can against the Assured Guaranty Corp. The island currently has more than $70 billion of outstanding debt, with a debt to GDP ratio of about 68%. Puerto Rico has been working with lawmakers in D.C. to work on budgets that will help relieve debt, as well as laws put in place that will help prevent the Puerto Rican debt to get any worse.