Debt-plagued Puerto Rico defaulted on a bond payment for the first time Monday, triggering what is likely to be a long battle with creditors as it seeks to restructure about $73 billion in loans.
The U.S. territory, whose governor has declared its debts “unpayable” and is seeking the largest restructuring ever in the country’s municipal bond market, paid just $628,000 of a $58 million payment owed by its Public Finance Corp. because the legislature didn’t provide enough money, according to the island’s Government Development Bank.
“Due to the lack of appropriated funds for this fiscal year the entirety of the PFC payment was not made today,” bank president Melba Acosta Febo said in a statement. “This was a decision that reflects the serious concerns about the commonwealth’s liquidity in combination with the balance of obligations to our creditors and the equally important obligations to the people of Puerto Rico to ensure the essential services they deserve are maintained.”
The default marks an escalation of the financial crisis on the island, which has been caught in a nearly decade-long recession that has crimped government revenues and triggered an exodus to the U.S. mainland.
Moody’s Investor Services, which tracks the bond market, said the default is likely the first of many to come. “This event is consistent with our belief that Puerto Rico does not have the resources to make its forthcoming debt payments,” Emily Raimes, a Moody’s vice president, said in a statement. “This is the first of what we believe will be broad defaults on commonwealth debt.”
In late June, Puerto Rico Gov. Alejandro García Padilla declared the island’s debts “unpayable” and called on creditors to come to the table to renegotiate repayment terms. Puerto Rico — unlike cities such as Detroit or Vallejo, Calif. — cannot seek protection under Chapter 9 of the U.S. Bankruptcy Code. García Padilla has called on U.S. lawmakers to grant Puerto Rico’s state-run corporations, which are highly indebted and provide vital services from electricity to water, the right to file for bankruptcy. That would allow those corporations an orderly process to restructure their obligations.
The Obama administration has voiced support for allowing the island’s corporations bankruptcy protection, but it has continuously emphasized that there will be no federal bailout for Puerto Rico.
In a letter last week, Treasury Secretary Jacob J. Lew told Sen. Orrin G. Hatch (R-Utah), chairman of the Senate Finance Committee, that Puerto Rico’s financial situation was “urgent” and said Congress should consider some orderly process to restructure the island’s debt.
Lew also voiced support for ongoing efforts on the island to devise a long-term fiscal plan that points to how the island would fix its fiscal problems and reignite the economy if some form of debt relief is extended. A group of policymakers is expected to present the restructuring plan by the end of this month.
Although some policymakers have embraced the idea of financial restructuring for Puerto Rico, many investors are opposed. They believe the island could continue to raise taxes, fees or utility rates, to pay what it owes. Moreover, they say, one reason they decided to loan money to the economically distressed commonwealth is precisely because it could not declare bankruptcy.
Public Finance Corp., a fiscal arm of Puerto Rico’s government, recently notified investors who hold appropriation bonds, typically those backed by funds set aside by the legislature, that it had not transferred money to a trustee to pay the debt due at the beginning of this month. The corporation said the legislature never actually appropriated the funds.
David Fernandez, a public finance attorney in New York, said he hopes that the default shifts the conversation about Puerto Rico’s debt away from the overall size of the obligation, to one that focuses on the level of debt — and ability to pay — exhibited by the individual issuers of bonds on the island. While the island’s electric utility has one set of problems, he said, perhaps other debt issuers are in better shape to pay. They might also face greater legal mandates to pay as well. For example, the island’s constitution says that general obligation bond holders should be paid even before government workers.
“It is the individual entities that have issued this debt. That is where the focus should be,” Fernandez said.