New York - Puerto Rico pushed a record amount of its bonds toward default by declaring a moratorium on debt payments after President Barack Obama signed a law sheltering the island from bondholder lawsuits as it seeks to arrest a financial collapse.
It will mark the first time the US territory has failed to pay on its general obligation bonds, a $13 billion swath that the island’s constitution says must be covered before other expenses. Governor Alejandro Garcia Padilla announced the decision as Obama enacted legislation to install federal oversight of Puerto Rico and extend it the power to cut debts in court, potentially strengthening the commonwealth’s ability to wrest concessions from recalcitrant investors. The island and its agencies owe about $2 billion on various securities Friday.
The default promises to usher in a final phase to a debt crisis that will ultimately be resolved under the guidance of U.S. appointed overseers. The step allows Garcia Padilla to use cash that would otherwise go to investors to avert cuts to schools, policing and health care that he has said would extract a heavy toll on an island where nearly half of the 3.5 million residents live in poverty.
Garcia Padilla’s executive order didn’t say how much of the debt coming due will be affected by the moratorium, nor how much, if any, of the payments will be made.
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The island’s crisis has been steadily building, with the economy continuing to shrink and the government effectively locked out of the bond market, where it routinely sold debt for years to paper over budget shortfalls. The concern about the consequences of the July 1 default triggered rare bi-partisan action on Capitol Hill, a step lawmakers decided was needed to avoid a financial bailout later.
That federal law known as Promesa, which cleared the Senate Wednesday, doesn’t provide any additional funds to Puerto Rico. Rather, it allows for the creation of a federally appointed control board to oversee the commonwealth’s budget and any debt reduction, which can now be enforced by a court, similar to a municipal bankruptcy. It also places a stay on lawsuits in the meantime, preventing a judge from ordering the island to make investors whole regardless of the cost to residents.
Not enough
“It’s not in and of itself going to be sufficient to solve all the problems that Puerto Rico faces, but it is an important first step on the path of creating more stability and better services and greater prosperity long term for the people of Puerto Rico,” Obama told reporters when signing the bill Thursday in the Oval Office.
Garcia Padilla’s executive order suspends payments on general obligations and bonds of other public agencies. It said the emergency also covers the convention centre authority, the employees retirement system, the Puerto Rico Industrial Development and the University of Puerto Rico. The affected entities will stop making lease payments to the Puerto Rico Public Buildings Authority, which has issued bonds backed by that revenue.
“While the current administration has expressed its satisfaction with the approval of Promesa in the U.S. legislature, it recognises that there are important steps to take at a local level, that should be adopted alongside this measure, to guarantee a sustainable economic recovery for Puerto Rico,” the governor said in a statement.
With the prospect of an orderly resolution brought about by the federal government, Puerto Rico bond prices have rebounded from lows. The S&P Puerto Rico bond index has risen for the past 23 days, the longest winning streak since 2012, to the highest since Garcia Padilla’s announcement last year that the government’s obligations were too much to pay. General obligations with an 8 percent coupon and maturing 2035 traded Thursday at an average 66.8 cents on the dollar, up from 65.2 cents on Tuesday, according to data compiled by Bloomberg.
Puerto Rico’s default would be the first payment failure from a state-level borrower on debt backed by the full power to raise taxes since Arkansas in 1933. Because the commonwealth’s crisis is unique, there hasn’t been any broader impact on the municipal-bond market, a haven where prices have been rising as money floods into the safest assets.
While Garcia Padilla has said the commonwealth doesn’t have enough money to pay investors in full and keep crucial essential services in place, Puerto Rico’s revenue collections, which were revised last year, are on target. The island collected $8.69 billion of general-fund revenue from July through May, $15 million above revised budgeted estimates, according to Puerto Rico’s Treasury Department.
BLOOMBERG