A Puerto Rico agency is poised to default on bonds for the first time Monday, initiating a clash with creditors as the struggling commonwealth seeks to renegotiate its $72 billion debt load.
The government doesn’t have the money for the $58 million of principal and interest due on Public Finance Corp. bonds, Victor Suarez, the chief of staff for Governor Alejandro Garcia Padilla, said during a press conference July 31 in San Juan.
The default promises to escalate the debt crisis racking the island, where officials are pushing for what may be the biggest restructuring ever in the municipal market. Puerto Rico bond prices have tumbled amid speculation that the island won’t be able to repay what it owes as its economy stagnates and residents leave for the U.S. mainland. It has about $5 billion of principal and interest due over the next 12 months, according to data compiled by Bloomberg.
“An event like this is significant enough that it could hurt prices for Puerto Rico bonds,” said Richard Larkin, director of credit analysis at Herbert J Sims & Co. in Boca Raton, Florida. “I can’t believe a default on debt with Puerto Rico’s name will go unnoticed.”
The lapse, which Puerto Rico officials had telegraphed in advance, didn’t have any immediate impact on the price of the island’s other securities. Puerto Rico general-obligation bonds maturing in 2037, which are given priority under the commonwealth’s constitution, traded for about 61 cents on the dollar Monday, up from 59 cents Friday.
The Finance Corp. bonds represent a small share of Puerto Rico’s debt load, and the island isn’t defaulting on interest and principal payments due on other securities. Government Development Bank President Melba Acosta said in a statement July 31 that a separate $169 million debt-service payment for the bank’s bonds will be made.
The Finance Corp., which has borrowed to help balance the government’s budget, has about $1 billion of debt. The securities are paid for with money appropriated by the legislature, unlike other bonds with a claim on tax money. That leaves bondholders with little recourse because the commonwealth hasn’t guaranteed repayment and the legislature isn’t obligated to allocate the funds.
Faced with a budget shortfall, lawmakers didn’t provide the money when they passed the annual spending plan. Island officials said that Puerto Rico’s available cash was limited to funding essential services such as health and safety.