Although the government of Puerto Rico paid its General Obligation bonds and guaranteed debt due May 1, which totaled about $103 million, Moody’s Investors Service believes it will enter into an eventual default of these bonds in the absence of a federal stay on litigation.
That action in turn will “trigger rapid legal response from bondholders citing the constitutional support. As our ratings indicate, we believe that the commonwealth will default on the GO and guaranteed obligations and that holders of those bonds are likely to receive among the best recoveries of all Puerto Rico bondholders in an eventual negotiated or judicially determined settlement,” the agency predicted in a report released late last week.
Moody’s detailed how the Government Development Bank of Puerto Rico’s (rated Ca/negative outlook) default on about $367 million, along with the recently enacted debt payment moratorium law, foreshadows a long battle to restructure Puerto Rico’s (Caa3/negative outlook) $7o billion of debt.
“We currently rate all of Puerto Rico’s debt either Caa3, Ca, or C — our three lowest ratings — and they are based on the expectation that all of Puerto Rico’s debt ultimately will default, and holders of all securities will face varying degrees of loss,” Moody’s said.
“The commonwealth’s payment of GO and guaranteed debt shows a continuing desire to defer impairment of securities with the strongest legal protections for as long as possible,” the agency said.
However, it predicted that restructuring numerous debt types by negotiation — Puerto Rico has 17 different debt-issuing entities — “remains a daunting task.”
“Puerto Rico faces the threat of proliferating litigation and an overhang of increasing pension pressures even if it makes progress toward consensual debt relief,” the agency noted.
Political pressure for the federal government to intervene may intensify. The federal government may play a key role in Puerto Rico’s debt restructuring, and the latest round of defaults could encourage Congress to act on pending legislation, “but we do not expect direct financial support to help pay debt service,” Moody’s concluded.