Puerto Rico will default on a portion of the nearly $1 billion in debt obligations due to its bondholders on Jan. 4.
Top officials for the commonwealth have confirmed that it will not be able to make two out of the 13 total payments due Monday to bondholders. Puerto Rico will default on a $35.9 million payment on the Puerto Rico Infrastructure Financing Authority, and a $1.4 million payment on the Puerto Rico Public Finance Corporation.
The remaining bonds will be paid, including $329 million due to general obligation bondholders, in which half of the payment, $163 million, is from the revenues clawed back from the Highways & Transportation Authority, the Infrastructure Financing Authority and the Convention Center District Authority bonds.
On Nov. 30, Puerto Rico Governor Alejandro Garcia Padilla enacted an unprecedented executive order to implement a "clawback" measure that would redirect money pledged to select tax-supported bonds in order to meet the GO obligation, which is backed by the commonwealth's constitution.
In a call with reporters shortly before scheduled public remarks midday Wednesday, Puerto Rican officials noted that since an executive order, no further payments have been made into the trusts, for which payments are drawn, on all three of the clawed back bonds — HTA, PRIFA, CCDA — constituting a default.
Puerto Rico first defaulted on a payment due to bond holders of the Public Finance Corporation, a subsidiary of the island's Government Development Bank, in August when it failed to make the full $58 million due. Since that historic default, the PFC has missed every monthly payment due to bondholders, which now totals $63.4 million.
Late Wednesday night, the CEO of Ambac, the largest insurer of Puerto Rico issued debt, sent a letter to senior officials of the U.S. territory, demanding that $117 million, which includes $94 million that was diverted prior by the governor's executive order authorizing clawbacks, be deposited immediately into PRIFA's Sinking Fund held by the trustee.
Stocks of insurers of Puerto Rico's paper dropped on the news — with Ambac, the insurer with the largest net par exposure to Puerto Rico ($2.4 billion as of Sept. 30), falling more than 3 percent intraday.
In the U.S., Obama administration officials said the default reflected the depth of Puerto Rico's debt problems and the importance of Congress acting in the form of an aid package.
"This increasingly urgent situation demands swift Congressional action to give Puerto Rico access to an orderly restructuring regime paired with independent oversight." a Treasury Department spokesman said in a statement. "Congressional leaders have committed to act, and the administration remains committed to working with Congress to address this crisis and put Puerto Rico on a sustainable path forward that protects the 3.5 million Americans who live in the commonwealth."
Puerto Rico's debt structure is complex. There are 18 unique bonds issued by Puerto Rican government entities, all with varying degrees of solvency and legal protections, which leaves many unanswered questions on how litigation will proceed following a default.
"It is important to note that many of the constitutional and statutory provisions that govern Puerto Rico debt have not been tested in Puerto Rico Courts so we are, to a large extent, trying to map uncharted territory," Sergio Marxuach, policy director at the Center for New Economy, a San Juan based nonpartisan research institute, said in a December note.
A default of any kind opens the door for pricey litigation. Senior officials of the commonwealth confirmed that they have been proactively preparing for any legal action that may be filed against the island and say they will do their best to protect the people of Puerto Rico.
CORRECTION: This article was updated to show that $329 million is due to general obligation bondholders.