Puerto Rico Public Finance Corp., the unit of the Government Development Bank for Puerto Rico that failed to make a scheduled payment to the bond trustee, may still be able to make its Aug. 1 debt payment, according to Municipal Market Analytics.
After PRPFC failed make its July 15 $94 million debt service payment, municipal market observers said that its default was imminent, and that it would be the first public entity to do so as the government looks to restructure $72 billion of debt.
"In our opinion," MMA analysts wrote Monday, "it remains quite reasonable to expect that funds will be delivered on time to avert a payment default - noting the extraordinary efforts made to keep Puerto Rico Electric Power Authority bondholders intact even as PREPA defaults grow more imminent - but partisan and intra-party squabbling over the PFC payment may prevent that from happening."
They also wrote, "to the extent one default happens, we expect the political viability of more defaults elsewhere will increase."
On Monday Standard & Poor's downgraded the series 2011A and B and 2012A Puerto Rico Public Finance Corp bonds to CC from CCC-minus, saying default on Aug. 1 was a "virtual certainty."
Moody's rates the PRPFC bonds Ca. Late last week Moody's said a statement: "The heightened prospects for non-payment of PFC debt service on Aug. 1 are consistent with our view that the probability of default on Puerto Rico's securities is approaching 100%, and the more legally vulnerable bonds carry the greatest loss potential."
On July 15 the PRPFC didn't transfer $94 million of debt service to the bond trustee as had been scheduled.
Puerto Rico's current approved budget does not appropriate money specifically to the PRPFC. The budget appropriates a total of $1.474 billion for the payment of debt, according to the Puerto Rico Senate Committee on Treasury and Finance. Of this total, $275 million has been appropriated for a range of debts coming due this fiscal year for $338.4 million. The PRPFC bonds are the only bonds in this $338.4 million pool.
All other debts in this pool are loans or lines of credit that either the Puerto Rico government or public entities within the government owe to the GDB.
Gov. Alejandro García Padilla has formed a Working Group for the Economic Recovery of Puerto Rico, consisting of leaders of his government and leaders of the Puerto Rico Senate and House of Representatives. He has charged the group to, among other things, come up with a proposal to restructure the commonwealth's debt by Sept. 1. After the group makes its proposal, the legislature will consider it and will vote on a debt restructuring at least for this fiscal year, a Senate source said.
At that point the legislature will consider how to allocate the $275 million among the $338.4 million debt pool.
Puerto Rico's government has said that nonpayment of the PFC bonds wouldn't constitute a Puerto Rico government default. The 2011 series A official document said, "The 2011 series A bonds will not constitute an obligation of the commonwealth or any of its political subdivisions or public instrumentalities (other than the corporation)."
Late last week the bond trustee for the bonds, U.S. Bank Trust National Association, in the aftermath of the failure to transfer the $94 million, said that it had hired the law firm of Hogan Lovells "to advise it in connection with this matter."
