Running out of both time and money, debt-ridden Puerto Rico appears headed for default on at least some of the roughly $1 billion in bond payments that are due on Jan. 1.
It is possible, the island’s leaders have suggested in official filings, that enough cash can be found to pay about $330 million due on general obligation bonds — those given top priority by Puerto Rico’s Constitution — but only by diverting cash from other types of bonds. A failure to make payments due on those would leave a mysterious hierarchy of bondholders in a legal quandary over whether to sue now or hope for some payment, even a lower one, down the road.
Even the United States Treasury secretary, Jacob Lew, said this week it was “inevitable” for Puerto Rico to start missing bond payments, although he said the coming defaults would not necessarily all happen Jan. 1.
“Look, they’re effectively in default” already, he said in an appearance on Fox Business Network on Monday. “They’ve already been taking money out of pension funds to pay current bills. They’ve been shifting money from one creditor to pay for another creditor. That’s effectively default. You don’t have to wait until you miss a coupon payment to say you’re in default.”
Photo
Gov. Alejandro García Padilla of Puerto Rico at the National Press Club in Washington earlier this month.Credit Sait Serkan Gurbuz/Associated Press
Exactly which payments the island will skip remained unclear Tuesday — and most likely will not be known until the very last minute — but could include certain bond payments by the Puerto Rico Infrastructure Financing Authority, the Highway and Transportation Authority and the Convention Center District Authority. (Although the deadline is midnight Friday, the island will be given a reprieve until Monday, Jan. 4, because of the New Year’s Day holiday.)
Those agencies and others are subject to a “clawback” ordered by Gov. Alejandro García Padilla, which allows the central government to claw back the money those entities had been intending to use to make their own bond payments; it will be used instead to pay the top-priority general obligation bonds.
Some of the entities losing their cash to the clawback are still expected to make their Jan. 1 payments, because they had previously set up emergency reserves. Still, credit analysts will probably consider them to be in technical default, because they will have depleted their reserves and the clawback will keep them from setting aside fresh money for the next bond payment.
Regulatory filings suggest that at least one entity, the Puerto Rico Infrastructure Financing Authority, has not set up a debt-service reserve and may have no way to avoid full default.
Governor García Padilla has already issued warnings that some of the island’s bondholders were likely to be left empty-handed, although he did not specify which. Almost 20 different entities on the island issue debt. Besides clawing back money from some of them, the government has been diverting cash from vendors, taxpayers and certain programs in a juggling act that cannot be sustained forever.
“It is very probable that from here on out, Puerto Rico will not find the mechanisms to make its payments,” said Governor García Padilla in a news briefing this month at the Puerto Rico Federal Affairs Administration in Washington. “Cash has run out. There are no more fiscal gymnastics that we can do.”
The creditors of one major Puerto Rican borrower, the public electric utility, have been concerned enough about a default to agree in advance to accept smaller payments. Earlier this month, a group of creditors of the big utility — the Puerto Rico Electric Power Authority, or Prepa — said they had agreed to reduce their bond principal by 15 percent and accept a lower interest rate, as part of a plan to keep Prepa from defaulting on its roughly $9 billion of debt.
The deal has not yet closed and is not expected to for several months. Only about 70 percent of Prepa’s creditors are on board; others may be waiting to see if a better offer comes along.
Puerto Rico has over $1 billion in debt payments due in January. It is expected to make payments on the bonds issued by its central government, but it is unclear whether it can pay the others that are due.
Puerto Rico’s debt payments due Jan. 1, 2016
ISSUER
AMOUNT DUE, IN MILLIONS
Commonwealth of Puerto Rico
$
335
(bonds issued by central government)
Electric Power Authority
302
Highway and Transportation Authority
104
Aqueduct and Sewer Authority
99
Public Buildings Authority
92
Infrastructure Financing Authority
36
Employees Retirement System
14
Industrial Development Company
10
Government Development Bank
10
Convention Center District Authority
10
University of Puerto Rico
2
Public Finance Corporation
1
Municipal Finance Agency
1
$
1,016
TOTAL DUE JAN. 1, 2016
Puerto Rico’s debt payments due Jan. 1, 2016
AMOUNT DUE,
IN MILLIONS
ISSUER
Commonwealth of Puerto Rico
$
335
(bonds issued by central government)
Electric Power Authority
302
Highway and Transportation Authority
104
Aqueduct and Sewer Authority
99
Public Buildings Authority
92
Infrastructure Financing Authority
36
Employees Retirement System
14
Industrial Development Company
10
Government Development Bank
10
Convention Center District Authority
10
University of Puerto Rico
2
Public Finance Corporation
1
Municipal Finance Agency
1
$
1,016
TOTAL DUE JAN. 1, 2016
Uncertainty is being heightened by the lack of a clear hierarchy of the island’s creditors. Much of the island’s $72 billion of financial debt — in the form of municipal bonds — has statutory and constitutional underpinnings that have not been tested in court. In some cases the Spanish-language version can be read differently from the English version.
“We are, to a large extent, trying to map uncharted territory,” said Sergio Marxuach, policy director at the Center for a New Economy, a nonpartisan research group in San Juan.
He recently issued a study of Puerto Rico’s complicated debt structure, which seeks to explain how the bonds’ legal provisions work, which have priority over others, how clawbacks might work and what the consequences of defaults could be. He found many unanswered questions. He confirmed that general-obligation bondholders are at the top of the pecking order, for example, but he also found that in Puerto Rico, they lacked the legal tools they would normally have to enforce their claims.
Second in line were bonds issued by other government agencies, but covered by the central government’s guarantee. Third was a type of bond backed by a dedicated sales tax. Those bonds have been issued by a governmental unit called the Puerto Rico Sales Tax Financing Corporation, known by the Spanish acronym Cofina, since 2006, initially as a way of balancing budgets in what was thought to be a recession. The recession has not ended and is now often likened to the 1930s, and Cofina has some $15 billion of debt outstanding.
Mr. Marxuach said Puerto Rico’s secretary of justice had issued an opinion that the sales taxes dedicated to Cofina could not be clawed back to make general-obligation bond payments, but whether that opinion would hold up in court had not been tested. He also said the Cofina bonds’ proceeds had been put to uses that “appear to be Constitutionally prohibited.”
“In the absence of a binding court decision, this legal issue remains open to judicial interpretation,” he said.
Questions like that might be put to rest if Puerto Rico is given access to the federal bankruptcy courts, something that Congress is expected to take up in the coming months. Some members of Congress have been calling for a limited form of Chapter 9 municipal bankruptcy, which would cover only a handful of the island’s public corporations.
But in recent months, as the size and legal complexity of Puerto Rico’s debt has come into focus, many policy makers have concluded that all of Puerto Rico’s debts should be restructured in one place.
“What I can tell you is, the first quarter of the year is an essential period of time for this to be addressed,” said Mr. Lew, referring to Puerto Rico’s pleas for access to bankruptcy. “And they need restructuring authority that covers all credit.”
The United States Treasury secretary, Jacob J. Lew, said it was “inevitable” for Puerto Rico to start missing bond payments. “Look, they’re effectively in default” already, he said this week.Credit Ricardo Arduengo/Associated Press
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