Bondholders, analysts, investors and insurers of Puerto Rico's paper are all closely eyeing how the its government will handle the July debt deadline. A missed or partial payment on GO bonds would be the first default on a security that carries the highest priority of repayment under Puerto Rico's constitution.
"I think at this point it will be very difficult to avoid default," said Nader Tavakoli, president and CEO of monoline insurer Ambac, at a Debtwire event Tuesday in Manhattan. Tavakoli also noted that by Ambac's calculations, Puerto Rico should be able to pay all interest due on the GOs on July 1, but that the principal portion due was in question.
The three largest insurers of Puerto Rico's bonds — Assured Guaranty, Ambac and National, a wholly owned subsidiary of MBIA — collectively have more than $800 million in exposure to the total $1.9 billion due July 1. The predominant exposure for two of the insurers is to bonds that are GO guaranteed — with Assured Guaranty and MBIA backing $196.5 million and $173 million, respectively.
Melba Acosta, the head of the Government Development Bank, which acts as the island's primary fiscal agent, addressed the July GO payment at the Debtwire event when questioned on the whereabouts of revenue that had been previously clawed back. Padilla had authorized the clawback late last year, a move in which revenue streams meant for certain tax-supported bonds were diverted to pay for debt that carries a constitutional guarantee.
"My understanding is that [the clawback revenue] will go to pay some sort of amount on the debt payment in July," Acosta said during a panel conversation on Tuesday.
However, Acosta noted that the revenues from the clawbacks are kept by Puerto Rico's Treasury Department, leaving the ultimate decision for how the funds are deployed in the hands of the Treasury secretary.
Other large payments due July 1 that are backed by the monolines include Puerto Rico Electric Power Authority, where MBIA and Assured Guaranty have exposure of $139 million and $35 million, respectively. That is in addition to Ambac's $41.7 million in exposure to PR's rum tax bonds and $38.6 million on the Public Building GO guaranteed securities.