Hedge funds sue Puerto Rico bank facing liquidity crunch

SAN JUAN — A group of hedge funds that say they hold a significant amount of Puerto Rico debt sued the island's troubled Government Development Bank on yesterday, a move that raises concerns about the future of an institution that issues loans and oversees the US territory's debt transactions.

The lawsuit filed by New York-based Brigade Leveraged Capital Structures Fund Ltd. and others is the first of its kind against the bank, which recently said it faces financial problems. Puerto Rico officials denied rumors it was closing amid a decade-long economic crisis.

The hedge funds argue that the bank is violating local laws by giving preferential treatment to certain creditors, in part by allowing government agencies to withdraw money even though it's insolvent.

"IF GDB continues making preferential payments as selected governmental depositors race for the exits, it will be impossible for GDB to restructure its debts," the lawsuit states.

The hedge funds demanded that the US District Court of Puerto Rico stop the bank from paying certain creditors and forgiving debt. The GDB has issued nearly $3.75 billion in outstanding bonds, a portion of Puerto Rico's $70 billion public debt load that the governor has said is unpayable and needs restructuring. Government officials have already said they expect to default in May on $400 million in bonds issued by the bank. The island has already defaulted on other smaller payments.

A GDB spokeswoman said the bank would issue a statement soon.

The lawsuit comes just days Puerto Rico's treasury secretary resigned as a board member of the bank to avoid a conflict of interest. The treasury secretary would be responsible for going to court to request receivership if needed.

Gov. Alejandro Garcia Padilla met on yesterday with key financial officials to discuss the future of the bank, which has about $700 million in cash. Garcia has said the government is not closing the bank but is looking at other options, including a moratorium. Last week, bank president Melba Acosta said all options are being reviewed given what she called the GDB's "fragile liquidity."

Senate President Eduardo Bhatia said late Sunday that legislators are prepared to approve a measure to restructure the bank if needed.

Puerto Rico does not have access to any local or federal bankruptcy laws, and it is seeking a debt-restructuring measure from US Congress to address its overall debt as officials warn the government is running out of money.