Gov. Alejandro García Padilla froze the transfer of revenues from the Puerto Rico Highways and Transportation Authority to its bonds, making the commonwealth the biggest technical defaulter in U.S. municipal history.
The governor’s order Wednesday, which uses the recently signed Puerto Rico moratorium law as its basis, affects all of the authority’s debt. As of August 2015 the PRHTA had $6.1 billion in bond debt outstanding, of which $2.4 billion wasn't insured.
At this point Puerto Rico is in technical default on at least $12.25 billion, which eclipses the $7.9 billion Detroit default.
Legislation to help Puerto Rico deal with its fiscal and economic crisis remained stalled in U.S. Congress, as lawmakers debate bankruptcy powers and a financial control board for the territory.
The governor's order won't stop payments on the authority's bonds until at least next year, according to a release from the governor's office. This is because there is enough money in the bonds' trust accounts to make payments until then.
García Padilla's order suspends transfers from highway tolls to bonds and imposes a stay on legal claims. It remains to be seen if bondholders observe this stay.
Bond insurer Ambac sued the authority on May 10 for several breaches of contract and fiduciary duty.
In his announcement of the emergency at the authority and the suspension of revenue transfers, the governor said the money would be used for the authority's operations, construction projects, and bills with suppliers.
The PRHTA got into financial trouble from 2009 to 2012 by borrowing $2.2 billion from the Government Development Bank for Puerto Rico without having a planned means of repayment, the governor said Wednesday.
Ambac, Assured Guaranty, and National Public Finance Guarantee, which all insure PRHTA debt, didn't comment on the governor's action.
Earlier this month the authority reached a public-private partnership deal with Autopistas Metropolitanas de Puerto Rico LLC, under which the company would lease two toll roads from the authority.
Wednesday's action "adds to the determination of the governor to grant the HTA an important part of the proceeds from the recent transaction with Metropistas," the governor's office said, using the company's nickname. The recent deal may have pushed the governor to take action so that he'd have flexibility with the proceeds, said Municipal Market Analytics partner Matt Fabian. The deal with Metropistas also was a primary trigger for Ambac's law suit.
The PRHTA owes $234 million on July 1, the third highest amount due for Puerto Rico public sector bonds on that date, Fabian said. About $780 million is due for general obligation bonds and $420 million is due for Puerto Rico Electric Power Authority bonds. By stopping the transfer of funds for the PRHTA bonds, the governor is stopping a significant drain on a public sector body, Fabian said.
Ambac's suit last week was its second against Puerto Rico, said Joshua Esterov, senior insurance analyst at CreditSights. It joined in January with Assured Guaranty in suing against the commonwealth's claw back of revenue for the commonwealth's guaranteed debt from various authorities.
The insurers will quickly go to court concerning Wednesday's action on the PRHTA, Esterov said. "If insurers give even an inch here, Puerto Rico is incentivized to take a mile."
The PRHTA bonds are like the Puerto Rico Sales Tax Finance Corp. (COFINA) bonds in that they have what seems like a dedicated stream of revenue. By redirecting the PRHTA revenue stream, the governor set a worrisome precedent for Ambac, which has insured a good portion of COFINA bonds, he said.