Puerto Rico will default on about $37 million in bond payments due Jan. 1 and divert revenue to make others, escalating a conflict with investors as Governor Alejandro Garcia Padilla seeks to restructure a $70 billion debt burden.
The amount is a fraction of the almost $1 billion in interest due at the start of the year. The island will miss payments on $35.9 million of non-commonwealth guaranteed Puerto Rico Infrastructure Financing Authority debt and $1.4 million of Public Finance Corp. bonds. The money is being used to help pay investors who are owned $328.7 million of interest on general-obligation debt.
Garcia Padilla has warned for weeks that if forced to choose between paying creditors and paying for essential services, he would favor his people. A skipped general-obligation payment would have marked a turning point in Puerto Rico’s debt crisis because the securities are considered to have the strongest legal protections among the island’s different issuers. The commonwealth’s constitution states that general-obligation bonds must be repaid before other expenses.
”My government has the responsibility to protect, as much as possible, Puerto Ricans from grave consequences,” Garcia Padilla said in a press conference in San Juan. ”In recent months we have put up a tough fight in Congress, looking for the tools we need. We all know that the creditors have spent a fortune lobbying against Puerto Ricans in Congress.”
Garcia Padilla this month started redirecting revenue used to repay certain agency debt to the central government’s coffers. About half of funds to make the general-obligation bond payment — $164 million — is coming from the clawback. By keeping the commonwealth’s pledge to those investors, he hopes to continue negotiating with bondholders as Congress works on a plan for the island, he said.
Agencies such as the Highways & Transportation Authority and the Convention Center District Authority had said they’ll use reserves to help pay their investors on Jan. 1. Holders of bonds issued by the Government Development Bank, the Public Buildings Authority, the Employees Retirement System, the Industrial Development Company and the University of Puerto Rico will also receive payments due in January.
The Infrastructure Financing Authority, while defaulting on some debt, will make payments that are guaranteed by the commonwealth. Holders of sales-tax revenue debt will also receive their payments– and for the future. Puerto Rico doesn’t have plans to clawback sales-tax collections because the government doesn’t have control over that revenue, Melba Acosta, president of the GDB, said Wednesday during a call with reporters.