Newspaper article International New York Times

Hedge Funds Sue Puerto Rico Bank ; Creditors Seek to Freeze Assets of State Lender before Money Runs Out

Newspaper article International New York Times

Hedge Funds Sue Puerto Rico Bank ; Creditors Seek to Freeze Assets of State Lender before Money Runs Out

Article excerpt

The group of funds, which owns bonds on the island, based part of their lawsuit on a confidential report that found the Government Development Bank insolvent.

A group of hedge funds has asked the United States District Court in San Juan to freeze the assets of Puerto Rico's powerful Government Development Bank, claiming it was insolvent and appeared to be spending what cash it had left to prop up other parts of the island's troubled government.

The bank had failed to provide financial data that creditors were entitled to under United States law, the hedge funds said in a lawsuit. The funds, which own Puerto Rico bonds, asked the court on Monday to bar further cash transfers by the bank, other than those essential to the well-being of the island's residents.

"Once G.D.B. spends its last remaining funds -- and it is only a matter of time -- many essential services in Puerto Rico may come to a halt," the hedge funds said in their complaint. By then, they said, there would be nothing left for the bank's creditors, who "will suffer substantial losses."

The bank plays a critical role in Puerto Rico's financial affairs, and if it stumbles, the effects would be widely felt.

The Government Development Bank has a debt payment of about $422 million due on May 1, and credit analysts doubt it has enough cash to make it.

The president of the bank, Melba Acosta Febo, said on Monday that the lawsuit's accusations were "erroneous" and that the bank was acting within the bounds of the relevant laws.

"The central claim of G.D.B.'s creditors, that G.D.B. has knowingly withheld financial information in order to prefer certain depositors over its bondholders, is wholly false and without basis in fact," she said, adding that the bank "will respond to the complaint in full through proper legal means."

The federal bankruptcy code bars Puerto Rico from Chapter 9 municipal bankruptcy. So, Congress is working on a law that would allow Puerto Rico to restructure debts under the watch of a federal oversight board. …

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