(Adds background and context on Puerto Rico's financial crisis and the lawsuit from GO bondholders)
By Nick Brown
Feb 22 (Reuters) - Creditors of Puerto Rico's sales tax authority have asked a federal court to prevent the U.S. territory from diverting the revenue that guarantees its debt to repay other investors, the latest volley in an escalating battle.
Crippled by high poverty and nearly insolvent public health and pension systems, Puerto Rico is trying to restructure $70 billion in debt to fend off economic catastrophe.
Its two largest debt classes are $18 billion in general obligation, or GO, bonds guaranteed by the island's constitution, and some $17 billion in so-called COFINA debt backed by sales tax revenue.
Funds holding more than $2 billion in senior COFINA debt on Wednesday sought to intervene in a lawsuit filed by GO bondholders against Puerto Rico's government. That lawsuit, led by Lex Claims LLC, says COFINA funds should be redirected to GO holders under payment priority rules.
In its statement, the COFINA group, which includes funds like Goldentree and Canyon Capital, called the GO bondholders' claims "meritless" and "self-serving."
The "baseless action threatens the island’s ability to re-access the capital markets," the group said.
The brewing battle between the GO and COFINA groups will be central to any debt restructuring. GO lenders, which include hedge funds like Aurelius and Monarch, say their constitutionally protected debt should be repaid ahead of all other obligations, while COFINA holders say sales taxes are exempt from that priority scheme.
GO creditors have run scathing ads on local radio blasting the "COFINA scam" and accusing that group of standing in the way of Puerto Rico's revitalization.
In Wednesday's statement, COFINA creditors said they have more than seven times as many local, individual investors than GO debt classes do. "Retail investors and retirees are in the crosshairs," the group said.
The COFINA filing follows a federal judge's ruling on Friday allowing the Lex Claims lawsuit to proceed.
Most debt-related lawsuits against the island's government are under a temporary freeze pursuant to a federal Puerto Rico rescue law passed last year. But Judge Francisco Besosa deemed this one an exception because it merely seeks to enforce legal protections rather than demand immediate payment of debt.
Puerto Rico's finances are under the supervision of a federally appointed board that must approve budgeting and other financial decisions. Governor Ricardo Rossello has until Tuesday to present the board with a fiscal turnaround plan outlining spending cuts and revenue initiatives.
The board has called for austerity, seeking $4.5 billion in annual savings. (Reporting by Nick Brown; Editing by Lisa Von Ahn)