The San Juan Daily Star
In 2nd amended complaint, Ambac says trustee BNYM failed to protect bondholders
By The Star Staff
Ambac Assurance Corp., a bond insurer, has filed a second amended complaint against the Bank of New York Mellon (BNYM) arguing its failure as trustee to protect the holders of certain Puerto Rico Sales Tax Financing Corp. (COFINA by its Spanish acronym) bonds the monoline insured.
The original complaint against BNYM was filed in 2017, while the new one is from July 10.
Ambac is a monoline insurer that provided financial guaranty insurance for more than $800 million in gross face amount of senior capital appreciation bonds issued by COFINA, which raised money through revenues derived from sales and use taxes imposed by the Puerto Rico government and which were pledged to repay COFINA’s bondholders.
As the commonwealth’s financial health worsened, a campaign to raid COFINA escalated. Between September 2015 and May 2017, there were at least seven material events of default by COFINA and the commonwealth under the terms of the COFINA bonds.
“Even before the events of default, BNYM had significant common-law obligations beyond its express contractual duties,” the insurer said. “Those common-law obligations included a duty to avoid conflicts of interest.”
As early as 2015, however, it was apparent that COFINA was headed toward insolvency and thus that the interests of senior and subordinate bondholders in COFINA had diverged. At that point, BNYM should have appointed one or more co-trustees to represent the different classes of bonds, or resigned from representing one or both classes, the insurer said.
Over 18 months, the events of default were brought to BNYM’s attention. Yet BNYM ignored them entirely until May 1, 2017, when it finally informed COFINA and the Puerto Rico Fiscal Agency and Financial Advisory Authority that the commonwealth and COFINA were in violation of their duty to debtholders.
“But instead of declaring an immediate Event of Default and accelerating the Senior Bonds, BNYM requested that the Commonwealth and COFINA attempt to cure the default within 30 days,” Ambac said.
“By failing and refusing to recognize events of default when required to do so, by depleting COFINA’s assets by paying periodic interest to holders of Subordinate Cash Pay Bonds, by failing to accelerate Senior Bonds, and by failing to cure the conflicts of interest that developed when default became imminent, BNYM breached its contractual, tort, fiduciary, and other duties to Ambac and to the holders of Senior Bonds that Ambac insured,” the insurer said. “Given the severity of the conflicts, the repeated Events of Default, and the obviousness of COFINA’s imminent insolvency, BNYM’s breaches were grossly negligent.”
BNYM did not answer requests for comment.