Puerto Rico at risk of largest default yet

Puerto Rico's looming default
Puerto Rico's looming default

Puerto Rico is at risk of registering its largest default to date, as $470 million in debt obligations are due to bondholders Monday.

Much uncertainty surrounds whether the financially strapped island can find the funds necessary to stave off a total default, with Gov. Alejandro Garcia Padilla saying this week that, despite the government seeking a solution with its creditors, an agreement that completely prevents a default is likely not "achievable."

The largest payment due Monday is $422 million owed by the Government Development Bank, which in the past has acted as the island's primary fiscal agent and lender of last resort.

Unfortunately, the GDB is besieged with its own liquidity crisis, with the most recent financial documents showing that the bank only had about $562 million in its coffers. The GDB's financial situation is in such dire straits that Garcia Padilla issued an executive order in early April declaring a state of emergency at the bank and initiating capital controls, which froze nearly all withdrawals and suspended the GDB's lending power.

Late on Friday, the bank announced it was able to come to an agreement with credit unions that hold approximately $33 million of the bonds due Monday, and it was still negotiating a potential transaction related to an exchange of all of the GDB's bond indebtedness. However, its statement noted that the transaction would require the participation of all of the GDB's creditors.

A Puerto Rican flag flies from a building in San Juan, Puerto Rico.
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In addition to the large GDB payment, the commonwealth also owes smaller sums on a handful of other bonds. The majority of those securities will likely be added to the list of "Puerto Rico bonds in default," according to Moody's Investors Service.

"The commonwealth may also default May 2 on pension obligation bonds issued for the Puerto Rico Employees Retirement System (Ca negative), revenue bonds of the Puerto Rico Industrial Development Co. (Caa3 negative), and bonds issued by the Highways and Transportation Authority (HTA, Ca negative)," said Ted Hampton, vice president and senior credit officer at Moody's, in a note issued April 25.

This will not be the first default for Puerto Rico, according to Moody's. The government has failed to make about $143 million in debt obligation payments on subject-to-appropriation bonds issued by the Public Finance Corp. since its historic default in August.

The chief executive of Ambac, one of the largest insurers of Puerto Rico paper with about $2.2 billion of net par exposure, believes that critical decision had a role in the bigger problem that is playing out now.

"Directionally the governor and his advisors seem to have adopted a narrative of defaults," said Nader Tavakoli, president and CEO of Ambac. "It seems as though the default on the appropriations bill was training wheels for a bigger default picture."

Governor Alejandro Garcia Padilla of Puerto Rico
Puerto Rico governor declares bank emergency

Ambac doesn't insure any of the coming May payments, but does have about $120 million of exposure to the $2 billion that is due July 1. Tavakoli said he is concerned about that obligation.

"We're hoping that before the July 1 date, either Congressman Bishop's bill, which we think is a very constructive bill, will get implemented and/or at the same time there are creditor conversations going on along parallel tracks to try and restructure some of that debt so that there's not a unilateral default by the commonwealth on that date," he said.

But that legislation to aid Puerto Rico in its plight has stalled in Congress. A markup of the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA, was abruptly pulled two weeks ago and has not yet been rescheduled.

U.S. House Speaker Paul Ryan attempted to assuage fears that compromise on the bill was still some distance away.

"We had a long meeting about this yesterday ... I think the Resources Committee and Treasury Department are getting very close [to finalizing the bill]," Ryan said at his weekly news briefing Thursday.

Ryan also noted that both parties are working in good faith to have amended legislation ready for discussion for when Congress returns from recess May 10.

PROMESA, in its current form, would delay debt payments and enact a stay on creditor litigation. It would also establish a presidential-appointed seven member federal oversight board to monitor Puerto Rico's finances and facilitate establishing a way to restructure the island's arduous debt load in an orderly fashion.

The inability of lawmakers in Washington to act before the May 2 payment deadline has left Puerto Rico's top officials weighing the island's options. Those include declaring a moratorium under a recently enacted law, trying to reach a forbearance agreement with its creditors or making a partial payment.

Unfortunately, in the eyes of the ratings agencies, anything short of the full $422 million payment due to the GDB bondholders would be considered a technical default.