Puerto Rico bond insurers demand transfer of rum taxes to sinking fund

By Caroline Salls

Pittsburgh, Dec. 30 – The Commonwealth of Puerto Rico’s governor and other top officials received demands from Ambac Assurance Corp. and Financial Guaranty Insurance Co. (FGIC) in connection with the commonwealth’s allegedly illegal clawback of revenues pledged to the Puerto Rico Infrastructure Financing Authority (PRIFA), according to an Ambac news release.

Ambac and FGIC collectively insure more than $863 million in outstanding principal amount of bonds issued by PRIFA, as well as other bonds issued by the commonwealth. Ambac said the PRIFA bonds are secured by federal excise taxes on rum and other articles produced in Puerto Rico and sold in the United States, which are collected by the United States and remitted to Puerto Rico.

According to the letter, Puerto Rico’s governor issued an executive order on Dec. 1, which orders the Secretary of the Treasury of the Commonwealth to claw back revenues pledged to PRIFA, among other public corporations.

“We are gravely concerned by this improper act, which violates numerous statutory and state and federal constitutional provisions, including the Puerto Rico statute governing the order of payment priorities in the event of a budgetary shortfall, Section 8 of Article VI of the Puerto Rico Constitution, and the Takings, Contracts, and Due Process Clauses of the U.S. Constitution,” Ambac and FGIC said in the letter.

“Even more concerning, however, is the diversion of as much as $94 million in rum taxes securing the PRIFA bonds before the executive order was issued.”

Under the PRIFA Enabling Act, Ambac and FGIC said the Department of the Treasury of the Commonwealth is required to transfer the first proceeds of the rum taxes to the Puerto Rico Infrastructure Fund when received from the United States, up to a maximum amount of $117 million per year.

Under the operative trust agreement, the monies must then be transferred as soon as possible to a separate sinking fund maintained in trust on behalf of PRIFA bondholders.

However, Ambac and FGIC said no monies were transferred into the sinking fund in September, October or November.

“The foregoing pattern of activity is unacceptable,” Ambac and FGIC said.

As a result, the letter demands that the rum taxes received in fiscal year 2016, up to the statutory $117 million limit, be immediately transferred to the sinking fund as required by the PRIFA Enabling Act and trust agreement.

In addition, Ambac and FGIC demanded that the commonwealth cease all efforts to claw back or otherwise take any action in violation of applicable Puerto Rican and U.S. law concerning any bonds issued by the commonwealth and/or its agencies and instrumentalities that are insured by Ambac and/or FGIC.

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