A newly formed group of Puerto Rico general obligation (GO) bondholders is seeking to litigate against the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).

Benchmark Bond Ratings, LP, Principal, Carl Dincesen has formed a creditor group to challenge the constitutionality of PROMESA as it applies to Puerto Rico’s constitutional debt.

The Constitutional Bond Investor Creditors group, CBIC group seeks uninsured individual investors, like myself, and institutional holders who will join us in building additional bondholder participation sufficient to commence litigation to protect our constitutional rights.

The group believes that extricating constitutional debt from PROMESA’s authority is the surest and fastest route to full recovery.

PROMESA’s forced write down provisions is a violation of due process. The US Constitution bars laws that apply retroactively.

After reviewing the proposed action over the course of many weeks, a top ranked nationally recognized tier 1 constitutional law and litigation law firm has expressed interest in proceeding with the case. What is currently contemplated is a bondholder action based on the above assertions and others on behalf of owners of constitutional GOs of the Commonwealth.

To move forward, the firm needs to know whether there is sufficient interest in forming a retail and institutional GO uninsured bondholder group.

The legal fee for joining the GO bondholder group will be allocated pro rata based on the amount of each member’s holdings relative to the aggregate holdings of the group. Our target is about USD 1bn in par representation.

A capped fee equal to two percent of par amount or less is a possibility, depending on the aggregate holdings of the group. This is the group’s thinking as to what a reasonable fee would be, being fairly certain that uninsured GO bondholders will get a recovery of about 80% under PROMESA if no action is taken.

Today, Puerto Rico's constitutional debt amounts to 13.5% of general fund revenue, and the Commonwealth has never exceeded the limit since the law was passed by the Commonwealth and approved by Congress in 1960. Still, Puerto Rico is failing to pay the holders of its GOs, in part because it is preferring other bondholders in violation of its own constitution.

Puerto Rico also owes substantial amounts to holders of COFINAs, which bonds are being paid from general fund sales taxes collected in the Commonwealth. Such sales taxes, however, by law must be used to pay Puerto Rico's constitutional GOs.

Recovery of these two classes of debt is essentially a zero-sum game. Unfortunately, many individuals and institutions hold both COFINA and constitutional GOs.

Since that is the case, it is up to both retail and institutional bond investors who do not own a significant amount of COFINA debt to assert the payment supremacy of the constitutional GOs.

The essence of the case is that subjecting Commonwealth Constitutional debt (GOs and guaranteed bonds) to the PROMESA Act's forced write down provisions is a violation of due process. That is the taking of property without due process.

The assertion is based on two facts: 1) the U.S. Constitution bars laws that apply retroactively where no law(s) previously existed; and 2) Congress approved the Commonwealth's Constitution in 1952 and its Constitutional debt limit in 1960, which limit has never been violated.

As you may know, litigation over defaulted bond payments has been frozen pursuant to PROMESA.

However, the Federal District Judge whose jurisdiction includes Puerto Rico, has allowed an investor lawsuit (Lex v. Padilla) to proceed because the complaint makes no demands payment on debt of the Commonwealth, its corporations, or municipalities. The plaintiffs in this case just filed an amendment to add a challenge on the validity of COFINA Corporation bonds.

In light of PROMESA, the proposed GO bondholder action will make no demand for payment at this time. Instead, it will challenge the constitutionality of just one very important aspect of PROMEASA. The lawsuit may also challenge the constitutionality of COFINA sales tax revenue bonds issued pursuant to Puerto Rico law.

My greatest concern for constitutional bondholders is that the decision by Governor Padilla to default on that debt may be viewed as a fait accompli by the financial control board authorized by the PROMESA Act.

The lawsuit's ultimate purpose is recovery of all defaulted constitutional bond principal and interest with interest on defaulted interest at the applicable coupon rate. The mere filing and acceptance in federal court may cause all concerned to reevaluate the wisdom of including constitutional debt in the Act.

In light of the amended filing in LEX v. Padilla, that action is now similar to the proposed action as to goals. The principal difference is the proposed action seeks to remove constitutional debt from the jurisdiction of PROMEASA, whereas it appears that in LEX the goal is being pursued within the confines of the Act.

Investors who have an interest in or questions about joining the proposed bondholder action should contact Carl Dincesen at 516 242 6776, or visit benchmarkbondratings.com

If there is sufficient interest, the above-referenced attorneys will contact GO bondholders regarding their holdings data for purposes of determining your percentage of the legal fee to litigate the case. Bond investors have no financial or legal obligation regarding the proposed action until representation is agreed to with the attorneys handling the case.

Unless many stand up, we all lose.