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Categorized | Capital Markets

Puerto Rico to miss new year payments

Posted on December 30, 2015

Flag of Puerto Rico at Capitolio, San Juan ID 41750618 © Wangkun Jia | Flag of the Commonwealth of Puerto Rico in front of Capitolio, San Juan, Puerto Rico.©Wangkun Jia/Dreamstime

Puerto Rico will default on a number of its obligations at the start of the new year, as the impoverished US territory — beset by nearly a decade of recession — runs out of cash.

The island, struggling under a debt burden of $72bn, will be unable to pay the entirety of roughly $1bn in claims due on January 1, Governor Alejandro García Padilla conceded on Wednesday.

    The US territory scrambled to pay $328.7m owed on the island’s general obligation debt, municipal bonds that are backed by the commonwealth’s constitution and among its highest priority debt.

    Puerto Rico was forced to claw back more than half of that amount from other government organisations, the governor said.

    Two bond insurers — Ambac Assurance and Financial Guaranty Insurance Company — have already lambasted the moves, which have affected funds set aside for the Puerto Rico Infrastructure Financing Authority.

    The island also paid $15.4m due on debt issued by the Puerto Rico Sales Tax Financing Corporation, known as Cofina debt by its Spanish acronym, and $9.9m owed by the Government Development Bank, the commonwealth’s de facto finance authority.

    The governor said the island would instead miss payments on $35.9m on debt issued by the Infrastructure Financing Authority as well as $1.4m on Public Finance Corporation bonds, which first defaulted in August.

    Melba Acosta Febo, president of the GDB, said that the island had chosen to default on obligations where bond documents stated revenues assigned to the organisations were able to be clawed back.

    Governor García Padilla issued an order in December that allowed Puerto Rico to shift revenues and funds set aside for some issuers — organisations that do not enjoy certain legal guarantees — to pay bond holders of higher priority debt, including those backed by the constitution.

    Investors in Cofina and general obligation debt have contended that they are both at the top of the complicated capital structure, and should be paid over the other when the island completely exhausts its reserves.

    A December study from the Center for a New Economy, a non-partisan research group on the island, put the general obligation bonds at the top of the complex pyramid, followed by issuers who have backing from the good faith and credit of the government. The group ranked the Cofina debt third.

    Lawyers and analysts have disputed the exact ranking and have warned that lawsuits are likely to begin once a payment on the bonds is missed.

    Credit analysts with both Moody’s and Standard & Poor’s have said that the dearth of liquidity implies it is only a matter of time before the commonwealth begins defaulting on its higher priority debts.

    US Treasury secretary Jack Lew said that it was “inevitable” for the commonwealth to default in the coming months, and that they were “effectively in default” after they began shifting money from some issuers to pay bills from others.

    Puerto Rico has attempted to stave off default on those obligations in a bid to avoid costly litigation that could undermine its restructuring work. Roughly 70 per cent of bondholders have already agreed to a restructure of debt issued by the island’s electric utility, taking a 15 per cent haircut.

    Prepa, as the utility is known, will make its $303m payment due at the year’s start.

    Questions have swirled over the hierarchy of the bonds — Puerto Rico has more than a dozen issuing authorities and investors have already clashed over who has first right to cash the island has claim over.

    Mr García Padilla has emphasised that he will prioritise essential public services over bondholder payments.

    Puerto Rico has paid roughly $200m to the trustee that handles Cofina debt, Ms Acosta Febo said, indicating that a February payment will be made on time.

    Investors now turn their attention to a May 1 payment owed by the GDB, which the government has yet to set aside or claw back funds for. The island faces a maturity wall of at least $1.9bn in July, according to the Centre for a New Economy, a payment analysts, investors and policymakers in Puerto Rico have agreed it will be unable to make.