HUFFINGTON POST
07/31/2015 09:07 pm ET

Puerto Rico To Default After Missing Payment

Unable to pay $72 billion in debt, the U.S. territory is on thin ice as citizens' needs collide with empty coffers.
Puerto Rico is set to default as a result of inability to pay $72 billion in debt, which could lead to the largest debt restr
Joe Raedle via Getty Images
Puerto Rico is set to default as a result of inability to pay $72 billion in debt, which could lead to the largest debt restructuring of an U.S. entity.

July 31 (Reuters) - Puerto Rico will miss a payment on debt due Aug. 1, the governor's chief of staff said on Friday, an event that will be considered a default by investors as the commonwealth lurches towards what could be one of the largest U.S. municipal debt restructurings in history.

The island faces a number of debt payments that day but had signaled in recent weeks that it may miss the $58 million payment on Public Finance Corporation (PFC) bonds.

"Tomorrow is Aug. 1 and we don't have the money," Puerto Rico's governor's chief of staff Victor Suarez told journalists in San Juan. "The PFC payment will not be made this weekend. It was not consigned."

Suarez also said the government only had enough cash to operate until November if no additional measures are taken to increase cashflow.

The PFC missed payment will mark the first by the commonwealth. According to a 2014 bond offering statement, Puerto Rico has never defaulted on the payment of principal or interest of debt.

"What could surprise investors is when they actually hear the word 'default,' and that a default occurred," said Lyle Fitterer, head of tax-exempt fixed income at Wells Capital Management, which holds mostly insured Puerto Rico debt.

"The immediate reaction might be a slight sell-off in the marketplace because I think people will start to anticipate, 'OK, what's the next series of debt they're going to default on?'"

Puerto Rico Governor Alejandro Garcia Padilla shocked investors in June when he said the island's debt, totaling $72 billion, was unpayable and required restructuring.

The non-payment by Puerto Rico would be the most notable since Detroit, which had about $8 billion of bonds, defaulted on $1.45 billion of insured pension bonds before it filed for bankruptcy in 2013.

The PFC skipped payment had been signaled to investors over the past few weeks. Suarez said on Monday that the commonwealth did not have the current cash flow to pay the PFC bonds. PFC bonds have weaker protections than many other Puerto Rico bonds.

"I bought my (PFC) bonds with the anticipation of them defaulting," said Ben Eiler, managing partner at First Southern Securities in Puerto Rico, earlier this week. "They're going to restructure in some form or fashion, and I believe that restructure is going to be higher than that level."

However, Puerto Rico is making another debt payment due. The head of its Government Development Bank (GDB), President Melba Acosta, said in a statement released Friday that the bank would make a $169 million payment for the debt service on GDB debt.

"From the perspective of Puerto Rico, it makes the most sense to default on the PFC bonds," said Michael Comes, portfolio manager and vice president of research at Cumberland Advisors in Florida. "There's no recourse back to them if they don't make the payments."

The likelihood of a restructuring is leading investors to wonder how Puerto Rico will prioritize debt payments versus citizens' needs.

"We're beginning to discern a ... mindset on the island that the government is weighing the interest of investors against the economic interest of the island," said Thomas McLoughlin, UBS chief investment officer wealth management research, on Thursday.

 

As Puerto Rico has hit rock bottom, the government told citizens they will have to sacrifice and share in the
Credit: Joe Raedle via Getty Images
As Puerto Rico has hit rock bottom, the government told citizens they will have to sacrifice and share in the responsibilities of the colossal debt.

 

DEFAULT DEBATE

Suarez told reporters in San Juan on Wednesday that a missed payment would not constitute default. Bond documents state that Puerto Rico's legislature is not legally bound to appropriate the funds for payment.

However, credit rating agency Standard & Poor's said earlier this week it would view non-payment of rated PFC bonds on their due date as a default. Moody's said it would also consider it a default.

"It (would be) the first failure by the government to pay on a debt to public investors and indicates the weakness of the government's ability and willingness to pay," said Timothy Blake, managing director of Moody's Public Finance Group.

A default could open the door to a fight with investors. Daniel Hanson, analyst at Height Securities, said in a research note that market participants would probably file suit in San Juan as soon as Tuesday.

Still, that could be an uphill battle.

"Our reading of the legal documents is that bondholders have very limited remedies," said David Hitchcock, an analyst at S&P. "Puerto Rico could potentially just ignore the bondholders."

Puerto Rico Justice Secretary Cesar Miranda said they had been anticipating "any type of litigation that this situation may cause."

"We have been organizing ourselves, using internal resources when we can, and external ones when necessary, to defend against any claim that is made," Miranda said. (Reporting by a contributor in San Juan; and Megan Davies and Jessica DiNapoli in New York; additional reporting by Karen Pierog in Chicago; editing by Clive McKeef, Dan Grebler and Ken Wills)

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