Puerto Rico Has Decided It Doesn’t Need to Pay Its Debts
Puerto Rico’s governor on Wednesday signed an emergency bill allowing the government to halt payments on its debt, throwing into doubt broader restructuring plans to stave off a financial collapse of the U.S. territory.
The measure, which earlier passed Puerto Rico’s legislature, lets Governor Alejandro Garcia Padilla declare a moratorium on any debt payment he deems necessary and could alter the structure of the Government Development Bank (GDB), the island’s primary fiscal agent.
“This legislation provides us with the tools to address the highest priority of needs—providing essential services to our people—without fear of retribution,” Garcia Padilla said in a statement.
Puerto Rico—burdened by a $70 billion debt load it says it cannot pay, a 45% poverty rate, and shrinking population—faces economic collapse without measures that either change its laws or involve an agreement with creditors.
Wednesday’s emergency law was rushed into existence as the GDB faces possible default on a $422 million debt payment due on May 1. Garcia Padilla had said he would consider a debt moratorium ahead of that deadline.
GDB and its creditors are trying to work out a consensual restructuring.
But the new law could spark “a new era of litigation” from creditors, said Daniel Hanson, an analyst with Height Securities. “We believe the overwhelming majority of Puerto Rican issuers have violated their creditors’ rights,” he said in a Wednesday note.
REBUKE AND PRAISE
Some GDB creditors on Monday sued to prevent a run on the bank, asking a federal court to block depositors from taking out their money while talks continue.
The passage of the law drew a quick rebuke from some creditors. Stephen Spencer, a financial adviser to bondholders including OppenheimerFunds and Franklin Advisers, said it might violate the terms of a prior restructuring deal at PREPA, the island’s power utility.
That deal, under which creditors agreed to take 15% repayment cuts, “should be explicitly preserved, rather than being cast into a state of uncertainty,” Spencer said in a statement. He said the law could “close the door to anyone extending new credit to Puerto Rico, seriously impeding its ability to meet citizens’ needs.”
In a statement on Wednesday night, PREPA Executive Director Javier Quintana Mendez said the agreement “remains in place and should not be negatively affected by the new law.”
“We continue working in collaboration with our creditors, focused on the implementation of our recovery plan,” Quintana said.
A second group of creditors holding debt issued by Puerto Rico’s sales tax authority, COFINA, expressed support for the debt freeze bill, citing delays in legislative efforts by federal lawmakers in Washington to address Puerto Rico’s crisis.
“With entrenched private institutions obstructing the legislative process in Washington, it is understandable that Puerto Rican leaders are taking steps to equip the island with the tools it needs,” Susheel Kirpalani, counsel to the COFINA Senior Bondholders Group at law firm Quinn Emanuel, said.
A rescue bill being drafted by the U.S. House of Representatives Natural Resources Committee so far uses U.S. bankruptcy rules as guidance for a solution, something many creditors oppose. Hearings are expected next week in Washington.
Relations between Puerto Rico and its creditors are growing tenser as major debt payments in May and July loom.
On Tuesday, some of Puerto Rico’s general obligation bondholders criticized the debt moratorium law, at the time still being debated by lawmakers, saying Puerto Rico was ignoring their offer to restructure debt by extending principal payments.
Garcia Padilla appeared to fire back on Wednesday, saying “our creditors have engaged in public relations efforts that contain falsehoods about their proposed ‘fixes’ – all of which are aimed at misinforming the public and dissuading Congress from doing what is right for our 3.5 million American citizens.”
Puerto Rico’s benchmark 2035 GO bond is down sharply since talk of a debt moratorium bill surfaced earlier this week. On Wednesday the bond fell 2.45 points in price to bid 63.299, yielding 13.33%, according to Municipal Securities Rulemaking Board data.
“Puerto Rico’s problems stopped being legal problems and they’ve started being a math problem… at the end of the day Puerto Rico can’t pay,” said Nicholas Venditti, portfolio manager at Thornburg Investment Management in Santa Fe, speaking at a luncheon for reporters in New York.