SAN JUAN, Puerto Rico — Bondholders filed to sue Puerto Rico on Tuesday in the first legal challenges to hit the U.S. territory after a freeze on litigation that protected it from lawsuits expired amid a deep economic crisis.
A group representing those who bought a portion of the $16 billion worth of bonds backed by Puerto Rico’s sales tax said in its lawsuit that a government plan to cut its $70 billion debt is unconstitutional. The group accused government officials of strong-arming it into what it called “unfair, unjust, and illegally punitive terms.”
Another lawsuit filed by Ambac Assurance Corp. accuses the government of illegally retaining $300 million owed to bondholders. The company said it also has been forced to pay more than $52 million in insurance claims as a result of ongoing defaults by Puerto Rico’s government.
The lawsuits are expected to be among several filed as bondholders seek to recover the money they invested in Puerto Rico government bonds. Puerto Rico already faced about a dozen lawsuits before the litigation freeze was implemented as part of a rescue package that U.S. Congress approved last year.
The newest suits come after the administration of Gov. Ricardo Rosselló failed to negotiate any deal with bondholders after the May 1 deadline of the litigation freeze. Puerto Rico has defaulted on $1.3 billion of principal owed since the previous governor declared the $70 billion public debt load unpayable in June 2015.
Puerto Rico Chief of Staff William Villafañe told press just hours before the freeze expired that the government preferred to reach a deal with bondholders. But he said embracing a bankruptcy-like process could be an option if negotiations fail.
“At least essential services would be guaranteed,” he said.
A spokeswoman for Gov. Ricardo Rosselló said there would be no immediate comment other than a statement issued late Monday in which the administration said it was pursuing consensual agreements but that other options are on the table.
“While we have not yet achieved an agreement in this instance, our lines of communication remain open, and we welcome the opportunity for further discussions,” said Gerardo Portela, executive director of the Fiscal Agency and Financial Advisory Authority.
Puerto Rico could announce a historic, bankruptcy-like procedure to restructure a portion of its $70 billion debt. By comparison, the U.S. city of Detroit had $9.3 billion of obligations when it filed for bankruptcy in 2013 in the biggest U.S. municipal bankruptcy ever.
Puerto Rico’s situation is more dire than Detroit’s because the city, in part, had a firm set of rules in bankruptcy court, an option that the U.S. territory doesn’t have, said Greg Clark, head of municipal research at Debtwire.
He also noted that that the government has to walk a fine line with bondholders amid negotiations.
“They’re going to need them again at some point,” he said. “Where that sweet spot is, nobody exactly knows.”
The government on Saturday offered to pay 50 cents on the dollar to holders of general obligation and sales-tax bonds backed by Puerto Rico’s constitution. Bondholders rejected the offer.
A fiscal plan for Puerto Rico sets aside $800 million a year for debt payments, a fraction of the $35 billion due in interest and payments over the next decade.