OppenheimerFunds and Franklin Advisers, which represent Public Finance Corporation bondholders, sent a letter to Puerto Rico government officials demanding that they take “all necessary actions” to make the $58 million payment missed this week.
In the letter, the entities said the nonpayment came “just a few short weeks” after Gov. Alejandro García-Padilla and Senate President Eduardo Bhatia said the government intended to negotiate with bondholders.
“Now, just a few short weeks later and before any negotiations have taken place, negotiations in which we have been willing to participate, the government of Puerto Rico has decided not to pay the Public Finance Corporation bond debt service payment,” the letter stated.
The missed debt service payment will impact individual holders of PFC Bonds, investors in the mutual funds of OppenheimerFunds and Franklin, “who have been partnering with Puerto Rico to finance infrastructure across the island for more than 30 years, and numerous local Puerto Rican bondholders, including individuals, banks, credit unions, and cooperatives.”
The letter was sent to Government Development Bank President Melba Acosta-Febo, and all of the GDB Board members, Fermín Contreras-Bordallo, Iván Méndez-López, Juan C. Zaragoza, Alberto Bacó and Luis Cruz-Batista.
Defaulting on the payment “makes Puerto Rico the first state-like entity to fail to pay its moral bond obligations. The path that the current administration has chosen will steer Puerto Rico toward litigation and create further deterioration in the capital markets’ trust in Puerto Rico, potentially leading to years of economic turmoil for the people of Puerto Rico,” the letter stated.
The missed payment, they said, is unprecedented and illegal.
“The legislative acts authorizing the notes that secure the bonds require the Commonwealth of Puerto Rico to honor payments due on the notes. One such Authorizing Act states that “[t]he Commonwealth of Puerto Rico shall honor, through budget appropriations…the payments of the principal, the interest and any other payment [required to repay the Notes]…,” they said in the letter, noting the language authorizes the Puerto Rico Treasury Secretary to honor the Commonwealth’s commitment.
“The Authorization Acts require the Commonwealth to honor the notes, and two Acts explicitly give the Treasury Secretary the power to meet those obligations — although the executive may otherwise have this power to carry out the Acts,” the letter stated.
“The Treasury Secretary must now exercise that power and advance funds to PFC so that it may make the August Payment. We hereby demand that PFC take all actions necessary to collect on the Notes, including compelling the GDB and/or the Treasury Secretary to transfer or advance funds to the Trustee for purposes of making the August payment,” they concluded.