Moody’s Investors Service on Wednesday released a report in which it predicted that Puerto Rico is “likely to default” on some of its debt service payments due in December, as “its liquidity pressure grows.”
Moody’s, which has classified the debt as junk under its “Caa3” status with a negative outlook, said the primary payment likely to default is the Government Development Bank, which has a $354.7 million obligation in notes due on that date. The GDB’s notes have a “Ca” classification, with a negative outlook.
Of the amount due, $273.3 million are backed by the commonwealth’s general obligation guarantee, with the remaining $81.4 million not backed by the same constitutional protection as the GO-backed portion.
“We believe the GDB has less incentive to make the latter part of the full payment. However, given Puerto Rico’s severe and growing liquidity challenges, the Commonwealth could also default on the GO-backed credit as well, which could trigger legal action on behalf of GO creditors,” the credit ratings agency said.
“A default on either security would be consistent with Moody’s expectation that the Commonwealth will be forced to miss debt service payments in favor of providing essential government services because of its increasingly weak liquidity position,” Moody’s noted. “As these pressures escalate, Puerto Rico’s ability to meet its obligations to bondholders is decreasing.”
The Commonwealth continues to operate with extremely limited internal liquidity and no access to external sources of financing. The government’s latest financial report confirmed that the GDB’s cash resources “may be fully depleted by the end of calendar year 2015.”
The government projects a negative $29.8 million cash balance in November, growing to a deficit of $205 million in December.
“Some recovery is projected in early 2016 with the enactment of emergency liquidity actions which may include utilizing tax revenues currently assigned to one or more government authorities and further delaying tax refunds,” Moody’s said, citing the Financial Information and Operating Data report the GDB released on Nov. 6.
The government has another payment due on Jan. 1 of some $330 million in GO debt service payment.
“While we expect the commonwealth to use all available measures to prevent a default on constitutionally protected debt, it has not been making the monthly sinking fund payments required for the Jan. 1 payment since July 2015,” Moody’s said. “Instead, it will rely on cash on hand in the Treasury’s single cash account to make the debt service payment, though…the projected November and December balances in the fund are negative.”
Earlier this week, Treasury Secretary Juan Zaragoza and GDB President Melba Acosta told lawmakers the government is looking for ways to avoid a default on its upcoming payments.