Puerto Rico Default Looms With $58M Payment Due

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Puerto Rico Public Finance Corp. may miss a $58 million bond payment due Monday, in what could be the first volley in the biggest municipal default in history.

The default by the subsidiary of the Government Development Bank for Puerto Rico is expected because the territory's legislature didn't appropriate money for the payment and the PRPFC failed to transfer $93.7 million on time to the trustee.

The bond deadline comes after Gov. Alejandro García Padilla said Puerto Rico's $72.2 billion of public debt is "unpayable." The governor called for a multiyear moratorium on payments, and assigned a task force to come up with recommendations in September.

A PRPFC default at this point would "statement of unwillingness" by Puerto Rico to pay its debt and would be viewed as a Puerto Rico government bond default, according to Richard Larkin, senior credit analyst at H.J. Sims.

"Puerto Rico will have no ability to borrow money for needed electric, water, street/highway and school capital needs, unless they are willing to accept unaffordable terms and interest rates by aggressive investors looking for high returns and quick repayment," he said.

Such an event "could signal the start of a new, more adversarial chapter in creditor negotiations," Municipal Market Analytics wrote in Weekly Outlook.

"We continue to strongly believe that a Puerto Rico default on any government-related security would greatly increase the risk of additional defaults elsewhere," they wrote.

However, events "remain highly unpredictable," MMA wrote. The key to the future is "how the commonwealth itself perceives its financial future, and the extent to which other stakeholders take control of, or exert influence over what is fundamentally a political budgeting process."

Michael Ginestro, head of municipal credit research at Bel Air Investment Advisors head of municipal credit research, said any damage may be confined to holders of the PRPFC debt.

"On the surface this obviously does not look good for investors holding other Puerto Rico bonds, but from a pure cash flow perspective, this demonstrates Puerto Rico's efforts in ring-fencing their cash and protecting the other more secure type of liens that will be much harder for them to restructure in court," Ginestro said in an email.

The PRPFC bonds were "appropriation debt," and thus Puerto Rico's government did not guarantee their payment. The official statement for the 2011 series A PRPFC bonds stated on its first page, "The 2011 series A bonds will not constitute an obligation of the commonwealth or any of its public instrumentalities (other than the corporation), and neither the commonwealth nor any of its political subdivisions or public instrumentalities (other than the corporation) will be liable thereon."

About $18.6 billion of Puerto Rico's debt outstanding at the end of March was backed by the full faith and credit of the commonwealth. Debt supported by commonwealth appropriation or taxes totaled $4.04 billion plus a tax and revenue anticipation note of $1.2 billion, according the Commonwealth of Puerto Rico Quarterly Report.

According to Municipal Market Analytics' Default Trends, the PRPFC bonds are among 217 government-related Puerto Rico CUSIPs with a payment due on Monday, including 172 COFINA, or sales-tax revenue, CUSIPs.

A missed payment by PRPFC would be the first Puerto Rico public sector default since the island was acquired by the United States in 1898.

Analysts have wrongly predicted default with respect to the Puerto Rico Electric Power Authority at least three times in the past two years. PREPA, which is in negotiations over its $8.2 billion of bond debt, made payments due in July last year and in January and July this year.

According to the El Vocero website, Puerto Rico Chief of Staff Suárez Meléndez said Thursday the PRPFC payment would not be made, "because there are no funds available to make it, to prioritize services in the areas of security, health and education."

A spokesperson denied he made the comment.

On Thursday, BlackRock head of municipal bonds Peter Hayes said it was a "near certainty" that the PRPFC wouldn't make Monday's payment. Hayes noted, however, that the municipal bond market strengthened in July despite default concerns.

"We expect high yield funds could be most affected by events in Puerto Rico, as commonwealth debt makes up some 28 percent of the S&P High Yield Municipal Index," Hayes said. "The potential for wider market disruption seems fairly muted."

 

 

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