Unless it can sell a securitized bond in the next few months, the Puerto Rico Aqueduct and Sewer Authority said it plans steps that would lead to a series of defaults on bonds and loans owed to Puerto Rican and United States government entities, though not to holders of PRASA bonds.
PRASA's announcement Friday afternoon may be an example of a "snowballing" of Puerto Rico's debt problems that Secretary of the Treasury Juan Zaragoza warned of last April in comments quoted by El Vocero.
So far there have been few Puerto Rico public sector defaults. However, things are worsening and "one key concern of the [United States] Treasury is that the downward slope doesn't reach a point where it's hard to rectify," said John Mousseau, director of fixed income at Cumberland Advisors. If there are many defaults the situation will be harder to rectify, he said.
PRASA outlined its contingency plans on the Electronic Municipal Marketplace Access web site. The authority said that due to its inability to sell a bond to pay for capital spending needs, it has outstanding bills to contractors of $140 million.
To keep current on its own bonds and pay its contractors, PRASA may divert money owed to the Puerto Rico Infrastructure and Finance Authority, the Government Development Bank for Puerto Rico, and the U.S. Department of Agriculture.
The authority noted that it is trying to get the Puerto Rico legislature to pass House Bill 2786, which would set up a securitization authority to sell debt on behalf of PRASA. This would be similar to what the Puerto Rico Electric Power Authority, in the deal it has negotiated with its creditors, is planning to do.
PRASA said in the EMMA posting that the legislature may not pass the securitization bill, that the governor may not sign it, and that even if both of these things occur, the new securitization authority may not succeed in selling a bond.
At the Feb. 16 meeting of the PRASA governor board, it adopted a contingency plan "for the purpose of making payments to its contractors." In this plan PRASA would cease making payments to its Surplus Fund and would reduce funding to its Commonwealth Payments Fund. A definitive decision to do this would be made by its governing board on or before June 30.
Reducing funding for these two funds would not lead to defaults on PRASA's bonds under section 8.01 of the Master Agreement of Trust, according to the EMMA posting.
However, a PRASA reduction in funding to the two funds would be expected to lead to insufficient funds being available to make "monthly interest accruals and principal accruals" for a variety of loans, bonds and notes. Among these would be a loan the Government Development Bank for Puerto Rico executed with PRASA on June 27, 2014.
It would also take a toll on Puerto Rico guaranteed debt such as Puerto Rico Infrastructure Finance Authority loans to PRASA and PRASA Rural Development Bonds from the United States Dept. of Agriculture. As Puerto Rico's government has indicated it will soon be forced to not pay its guaranteed debt, it is questionable whether Puerto Rico would observe these guarantees.
PRASA's $140 million in outstanding bills to contractors compares with fiscal year 2015 revenues of $1.08 billion.
Bel Air Investment Advisors director of municipal research Michael Ginestro said PRASA's announcement of a threat to default on debt to the GDB and PRIFA was a way of it pressuring Puerto Rico's legislature to approve the securitization. The Puerto Rico House was expected to vote Monday, according to Bloomberg News.
