Puerto Rico gov’t defaults, halts monthly GO transfers
Investors in Puerto Rico debt got double-whammied by the island’s government Monday, which missed a $58 million debt payment as it had predicted it would, and separately told creditors it has temporarily suspended monthly deposits to its General Obligation (GO) bonds redemption fund.
Early in the day, the government gave notice to holders of Puerto Rico Public Finance Corporation bondholders — comprising mostly local individuals and credit unions — that it made only a partial payment of some $628,000 of $58 million due Aug. 1.
The PFC debt, which is payable through legislative appropriations, is the first payment the government has missed since it began borrowing in the open market. The partial payment was made from funds remaining from prior legislative appropriations for the payment, which was not included in this year’s budget, as Government Development Bank President Melba Acosta confirmed several weeks ago.
The Legislature’s decision “reflects the serious concerns about the Commonwealth’s liquidity. Therefore, in accordance with the terms of the Trust Agreement, because no funds have been appropriated for the current fiscal year, only the remaining prior legislative appropriations were applied to make the partial payment that was made today [Monday],” according to the notice the GDB filed before the Municipal Securities Rulemaking Board.
The missed payment made headlines around the world, with major media outlets highlighting Puerto Rico’s ongoing fiscal problems and their possible repercussions.
Credit ratings agency Fitch said the government’s decision to miss the payment “is consistent with both the commonwealth’s stated intent to restructure its debt and its current liquidity pressures.”
Fitch rates the commonwealth’s General Obligation (GO) and related debt ‘CC’ ; Rating Watch Negative, “which indicates Fitch’s belief that default of some kind appears probable.”
“As the commonwealth’s restructuring plans become clearer, a downgrade to ‘C’ would be triggered on a security-specific basis at the point that default appears inevitable. The commonwealth has declared its debt unpayable in aggregate without distinction among its numerous securities,” Fitch said.
“Therefore, at this stage Fitch does not believe that there is sufficient information available to consider default of any of the specific credits that Fitch rates to be inevitable. Fitch’s public finance ratings do not address the loss given default of the rated liability,” it added.
Later in the day, the GDB filed a second notice, this time letting GO bondholders that the Secretary of the Treasury has temporarily suspended the monthly deposits made to the reserve used to pay the principal and interest of the Constitutionally protected debt, as provided by Act 102, signed earlier this year.
The original law signed in 1976 established that the government had to transfer one-sixth of the interest and payment each month, to collect the payment due to bondholders twice a year.