Puerto Rico defaulted on some of its debts this weekend after years of battling to stay current on its obligations, signalling the start of a long and contentious restructuring process for the US commonwealth’s $72bn debt pile.
The territory, which successfully scrambled to make a $169m payment on debts owed by the Government Development Bank on Friday, did not make a $58m payment on Public Finance Corporation bonds, according to Victor Suarez, chief of staff for Puerto Rico’s governor.
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“We don’t have the money,” he said on Friday, according to newswire reports. “The PFC payment will not be made this weekend.”
The missed payment will push Puerto Rico formally into default after the close of business on Monday said credit rating agency analysts. The PFC bonds are the first to fall into arrears, and a government “working group” is racing to come up with a plan to restructure the territory’s debts and overhaul its economy.
Puerto Rico governor Alejandro Garcia Padilla startled investors earlier this year when he said the commonwealth would not be able to pay off all of its debts and required a restructuring, a move many bondholders — especially creditors to the government itself — are loath to accept.
The PFC bonds hold fewer protections than “general obligation” bonds issued by the Puerto Rican government. The US commonwealth is likely to prioritise which bond payments it makes over the remainder of the year, said traders and portfolio managers.
Peter Hayes, head of municipal bonds at BlackRock, the world’s largest fund manager, said the missed payment would be an “awakening” for investors who were holding Puerto Rican debt to generate income.
“It gives you an indication of how [Puerto Rico] is going to proceed going forward,” he said. “They will have some interruption to debt payments, potentially a moratorium of debt service. It is indicative of their solvency situation.”
Mr Hayes added that economic activity would have to grow “substantially” in a very short time to avoid a haircut of $30bn to $40bn, which is necessary to get Puerto Rico “out from underneath this debt”.
Nonetheless, litigation may start as early as next week, predicted David Kotok, chief investment officer of Cumberland Advisors.
“A moral obligation requires an appropriation, and the Puerto Rican legislature failed to appropriate the money,” he said. “The reason is simple: they don’t have it. Investors were warned in the documents that were issued with the bonds, so their claim may be a weak one.”
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Puerto Rico has argued that a failure to make a payment on the PFC debt would not constitute a default because they are morally obliged bonds and do not carry the same legal protection that general obligation debt does. Analysts at two major rating agencies have refuted that claim.
Emily Raimes, a Moody’s analyst, said the rating agency would view a missed payment as a default of the commonwealth and that if financing was ultimately secured at the eleventh hour to pay the $58m, it would not change the agency’s view on Puerto Rico.
“Defaults are very likely,” she said. “Whether they occur next week or at the next debt service, it does not matter to our ratings.” Moody’s rates Puerto Rico at Caa3.