Puerto Rico faces a Jan. 1 deadline for roughly $1 billion in debt payments and has already signaled some of that amount could lapse into default, opening the door to potential litigation with creditors.
While analysts and sources close to the matter expect Puerto Rico to pay the roughly $330 million in general obligation debt due on Jan.1, nothing is certain. They said the tiny Caribbean island may be more likely to default on its other debt.
The U.S. Commonwealth, suffering from a near decade-long recession with a 45 percent poverty rate and a shrinking tax base due to people leaving the island, first defaulted in August when it failed to make the full payment on its Public Finance Corp (PFC) bonds.
Governor Alejandro Garcia Padilla has argued that the island’s debt, totaling around $70 billion, is not payable and requires restructuring. Puerto Rico has been negotiating with creditors to try and persuade them to take a reduction.
One source with GO debt exposure said debtors usually advise creditors ahead of time when they plan to default, and Puerto Rico had not indicated a default to GO creditors.
Daniel Hanson, an analyst at Height Securities who follows Puerto Rico, said in a Tuesday report that GO bonds have a “very high” probability of being paid, but that the island will likely skip some $35 million in Infrastructure Finance Authority (PRIFA) bonds, $1.4 million in PFC bonds, as well as possibly $91 million on bonds at its buildings authority (PBA).
Another creditor-side source told Reuters on Tuesday that some creditors were preparing possible lawsuits in the event of default, but it was unclear how quickly they could be filed.
The timing of Puerto Rico’s decision is unclear because the January 1 due date is a holiday. An announcement could come as soon as this week, or be delayed until next Monday, Jan. 4.
Skipping a payment on the GO bonds could be a jolt to the municipal bond market as GOs are viewed as safe. Puerto Rico’s GO bonds are backed by the good faith, credit and taxing power of the commonwealth and its bond documents state that such debt will constitute a first claim on available commonwealth resources.
Garcia Padilla on Dec. 1 granted the U.S. territory power to take revenues from public agencies such as the highways agency HTA, PRIFA and its convention center authority in order to pay GO debt and maintain essential services.
Default on any debt is likely to lead to litigation, but there is a “very high degree of certainty” that a missed payment on GO bonds would trigger lawsuits, Moody’s Senior Credit Officer Ted Hampton said last week.
Puerto Rico’s plight has gained increasing attention in Washington D.C., where the U.S. Treasury has been pushing Congress to allow the island to restructure its debts under U.S. bankruptcy law. The House is expected to hold a Jan. 5 hearing on Puerto Rico’s financial problems.
A GO default could be the most significant since Detroit defaulted on GO bonds in 2013. John Miller, co-head of fixed income for Nuveen Asset Management, which holds around $300 million in par value of insured Puerto Rican paper, said last week that not paying GO debt would be “very negative” for Puerto Rico bonds.
Island officials have given clear warnings of defaults. Garcia Padilla said last week that it is “very, very unlikely” there will be no default on debt due Jan. 1 and has also said the island has “no money”.
Melba Acosta, president of the island’s Government Development Bank (GDB) was quoted in local media saying the island is expected to default on a Jan. 1 payment on its PRIFA bonds.
