Hedge funds holding Puerto Rico’s general-obligation bonds are asking a court to stop the commonwealth from directing sales-tax revenue to repay other debt backed by that money because it violates the island’s constitution, Bloomberg News reported on Friday. It is the first legal action for the U.S. territory that pits general-obligation bondholders against investors of sales-tax debt. Puerto Rico’s constitution states its general obligations must be repaid before other expenses. A portion of the island’s sales-tax revenue is dedicated to repaying bonds, called Cofinas by their Spanish acronym. Entities managed by Aurelius Capital Management, Autonomy Capital, Covalent Partners, FCO Advisors, Monarch Alternative Capital and Stone Lion Capital Partners in July sued Governor Alejandro Garcia Padilla in U.S. District Court in San Juan to stop the administration from transferring funds away from bondholders. The hedge funds say it violates a federal law, PROMESA, which prohibits the island from enacting new legislation to divert revenue or assets that would go against its constitution. The hedge funds filed an amended complaint Friday. It adds the Puerto Rico Sales Tax Financing Corp., issuer of the Cofina bonds, as a defendant. Read more.
For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage.
