Aurelius Capital Challenges Puerto Rico Oversight Board Structure

Aurelius Capital Management LP has asked a federal judge to bar Puerto Rico's financial oversight board from writing down the island's $73 billion in debt until the U.S. Senate confirms the boards' members.

The seven members of Puerto Rico's federal oversight board were installed improperly, without approval from the U.S. Senate, according to court papers filed Monday in the U.S. territory's bankruptcy proceeding. President Barack Obama instead selected the board's members off of lists of candidates drawn up by congressional leaders.

Mark Brodsky's hedge fund has roughly $470 million in bonds on the line in Puerto Rico's financial restructuring. The fund's objection amounts to a constitutional challenge to the federal rescue law enacted last year to tackle Puerto Rico's massive pile of debt and pension obligations.

A local electric-utility labor union filed a similar objection earlier Monday in the hopes of undoing the board's decision to place the Puerto Rico Electric Power Authority under court protection.

The rescue law, known by its acronym Promesa, empowered the board to place Puerto Rico and its debt-laden agencies into bankruptcy, where a judge could impose deeper losses than creditors anticipated.

Wall Street bondholders like Aurelius are now at odds with the board, as are Puerto Ricans facing possible pension cuts, austerity measures and work furloughs designed to stanch a tide of red ink in the government budget.

To challenge the board's structure, Aurelius has hired veteran appellate lawyer Ted Olson, solicitor general under President George W. Bush, who helped convince the U.S. Supreme Court last year to block Puerto Rico from writing its own bankruptcy laws.

Monday's objection should come as "no surprise," Mr. Olson said, because the potential constitutional problem "has been obvious ever since the legislation creating it was debated in Congress."

Still, it marks an escalation in creditors' attempts to shift responsibility for Puerto Rico's financial woes to the U.S. government. Last month a different creditor group sued for a court order putting federal taxpayers on the hook for losses in the debt crisis. Creditors have been suing Puerto Rico since early last year over an escalating series of debt defaults, but never before had a group targeted Uncle Sam directly for damages.

Optimism among creditors was high last year that the board would find consensual debt settlements and avoid expensive litigation. But tentative deals to restructure Puerto Rico's general-obligation bonds and its power-utility debt have been met with the board's veto, despite prodding from congressional Republicans to take a more creditor-friendly stance. Now, the board is clashing with Puerto Rico's governor, who is pledging to defy an order to begin cost-saving employee furloughs starting Sept. 1.

Write to Andrew Scurria at Andrew.Scurria@wsj.com

(END) Dow Jones Newswires

August 07, 2017 17:17 ET (21:17 GMT)