Puerto Rico's decision last month to stop setting aside money for its general obligation bonds set off debate over how and whether the government will make its Jan. 1 GO payment.
The general obligations have a superior claim on revenues, leading the speculation that money for highway, infrastructure or other authorities may be diverted to make the GO payment. Yet government officials have indicated they may negotiate over payments due to creditors in order to retain funds needed to provide essential services to citizens.
"Postponing the set asides clearly points to their liquidity challenge," said Joseph Rosenblum, director of municipal credit research at AllianceBernstein. "In the past, that would have been handled through an external tax and revenue anticipation note borrowing. That is no longer feasible. Like the past TRANs, I am assuming the expectation is that later-in-the-year tax revenues would be used to pay off the obligation."
However, this may not be a dependable means of getting money for the GO payment, Rosenblum said. "One has to be a little worried and/or skeptical that their budget numbers will actually perform the way they expect. The economy doesn't look to be strengthening and their track record for meeting budget projections is certainly not strong."
Article VI, section 8 of the Puerto Rico constitution says, "In case the available revenues including surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall first be paid, and other disbursements shall thereafter be made in accordance with the order of priorities established by law."
Until early July a 1976 law required Puerto Rico's government to equally set aside its interest and principal general obligation debt service on a monthly basis. The 1976 law required the Puerto Rico to set aside each month one sixth of all interest coming due in the coming six months. It also required the commonwealth to set aside monthly one twelfth of all principal coming due in the coming 12 months. The funds were set aside in a redemption fund.
In early July Gov. Alejandro García Padilla signed a measure annulling the 1976 law.
On Monday Puerto Rico posted a statement on the Electronic Municipal Market Access site that said it had "temporarily suspended" the set asides.
When the idea of stopping the set asides surfaced in June, Puerto Rico Representative Rafael Hernández Montañez told The Bond Buyer that Puerto Rico would make its GO payments. Hernández Montañez is the president of the Puerto Rico House of Representatives Treasury and Budget Committee and a member of the Popular Democratic Party with García Padilla.
Since then, Puerto Rican officials have not been as definitive that Jan. 1's $375 million GO payment will be made. After the governor signed the measure allowing the set asides to be suspended, his office sent out a press statement saying that, "the suspension of these deposits does not imply a breach with the bondholders on the date of payment."
In mid-July Puerto Rico Director of the Office of Management and Budget Luis Cruz Batista told the El Vocero news site that the GO payment was not assured. Earlier this week, Melba Acosta Febo, the president of the Government Development Bank for Puerto Rico told El Vocero that she couldn't guarantee the GO payment but that the government was working to improve the central government's liquidity so it could make the payment.
"We recognize the GO's priority over other debts and its difference from other debts, but we must also recognize that there is a duty of the state to maintain health services, education services, and some security to our people - we must look at those things," El Vocero quoted her saying. "So it is a part of a negotiating process, in which both parties are agreeing to modify certain terms and in which conditions of some payments are very difficult."
A source close to Puerto Rico's government told The Bond Buyer that Puerto Rico planned to negotiate a restructuring of at least some of classes of its debt starting in this fall.
On Monday the Puerto Rico Public Finance Corp. defaulted on a $58 million bond payment because the island's government hadn't appropriated any money for the PRPFC in this year's fiscal budget. Acosta Febo told El Vocero that when Puerto Rico meets with bondholder groups this fall about restructuring their debt, it will meet with PRPFC bondholders.
Puerto Rico's GO debt has a superior claim to revenues compared with other commonwealth debts and financial claims. Motor vehicle fuel taxes, crude oil and derivative products excise taxes, cigarette excise taxes and license fees allocated to the Puerto Rico Highways and Transportation Authority can be diverted to pay the GO debt, according to the official statement for the March 2014 Puerto Rico GO bond sale. In addition, some rum tax payments allocated to the Puerto Rico Infrastructure and Finance Authority can be diverted. Finally, hotel occupancy tax revenues currently flowing to the Puerto Rico Convention Center District Authority can also be shifted to pay the GO debt.
"Nothing in the constitution or in applicable law expressly requires the highways authority, PRIFA, or PRCCDA to return to the commonwealth funds already transferred to it, even if other available resources of the commonwealth are insufficient for the payment of public debt," the official statement said. As things stand now the government can divert the flows of money from these authorities but cannot order their return to the government.
In recent weeks the government has adopted a law allowing it to borrow from its insurance funds on a short-term basis. It is possible that the government will also pass a law allowing it to raid the authorities' funds to gain money for GO payments.
Analysts commenting on the situation were unsure what the suspension of the set asides meant.
The Jan. 1 GO payment is at risk, Rosenblum said. "It may also depend on what other kinds of bonds they will not pay which might be used for the GO bonds, if that is their order of priority."
Another municipal bond analyst, who declined to be identified citing company policy, said that Puerto Rico may divert the revenues mentioned in the GO's official statement. Puerto Rico recently increased its oil taxes, and he said if it can get some part of an oil-tax-revenue-backed bond sold, this could also help its ability to make the Jan. 1 payment.
Asked about the set aside suspension, Evercore Wealth Management director of municipal research Howard Cure said, "I don't know if their intention is not to pay or if this is some sort of tactical move to get people's attention." He said it was hard to say what is going on without seeing Puerto Rico's anticipated cash flow.
