Puerto Rico Being Sued By Hedge Funds For Dodging Payments

Puerto Rico's government is facing a lawsuit in New York by a group of hedge funds, which claim the U.S. territory is misusing an emergency fiscal-crisis law to avoid payments on a $3.5 billion in bonds.

Puerto Rico approved "The Emergency Moratorium and Financial Rehabilitation Act" in April, which would allow the territory to dodge payments on $3.5 billion in bonds that would otherwise be guaranteed by the island's constitution.

Puerto Rico's debt obligations stands at $70 billion, which is more than any U.S. state can claim — with the exception of California and New York.

Related Link: Puerto Rico's Default Hurts Local Investors The Most

Bloomberg cited Puerto Rico's governor's chief of staff Grace Santana as saying that the hedge funds decision to sue rather than negotiate "demonstrates their continued refusal to acknowledge the reality of the commonwealth's fiscal crisis."

On the other hand, the suit claims various wrongdoings by Puerto Rico's government, including improperly diverted tax revenue to a state-run financing corporation to issue more debt rather than repaying bondholders.

The Puerto Rico Sales Tax Financing Corp. has been issuing billions of dollars worth of debt since 2006, which the bondholders claim is being done to "evade the Constitutional Debt Priority Guarantee."

"The Puerto Rico Constitution's carefully calibrated provisions do not permit such subterfuge," Bloomberg also quoted the plaintiffs as saying.