The government of Puerto Rico will default on several debt payments due May 2, including $422 million due from the Government Development Bank, “regardless of whether Congress enacts pending fiscal oversight legislation,” Moody’s Investors Service predicted.
“In the absence of federal action, the defaults will encourage bondholder litigation, likely prolonging efforts to restructure Puerto Rico’s approximately [$70 billion] of debt. Even if federal oversight legislation is passed by the end of next week, Puerto Rico will still default because the commonwealth treasury and the GDB, which has long been the government’s fiscal agent, have insufficient liquidity for upcoming debt payments,” the ratings agency said in a report released late last week.
The agency predicted that the largest share of the expected missed payments is $422 million due on GDB senior notes, which is the bulk of the $470 million in debt service payment due in little more than a week. The commonwealth has payments due on pension obligation bonds issued for the Puerto Rico Employees Retirement System, revenue bonds of the Puerto Rico Industrial Development Company, and bonds issued by the Highways and Transportation Authority.
“These impending defaults would follow the government’s efforts to emphasize its severe cash depletion during the past year,” Moody’s said.
In its assessment, Moody’s said it expects for the commonwealth to pay General Obligation and government-guaranteed bonds to avoid “almost certain litigation that would quickly follow non-payment on such debt.”
Meanwhile, the ratings agency said that if Congress were able to pass legislation that would halt creditor lawsuits and establish a federal control board with powers over Puerto Rico’s budget as well as the ability to restructure Puerto Rico’s debt in court before May, the commonwealth would be able to hold off on the upcoming payments without threat of bondholder litigation.
“However, if Congress does not act in time, Puerto Rico will rely on its own recently enacted debt moratorium statute as the basis for not paying. Using the moratorium, in our view, will elicit creditor litigation arguing that the law violates U.S. constitutional principles including the contracts clause,” Moody’s said.
“Whether they occur in the context of federal oversight legislation or under the local moratorium law, the impending non-payments will constitute defaults by our definition. In addition, we would characterize any non-payment under an agreement with creditors as a default,” Moody’s added.
“In the absence of a federal oversight framework, litigation resulting from expected defaults will likely impede efforts to reach consensual settlements with investors. As the holders of Puerto Rico’s various security types make competing claims — perhaps in different courts and with no prevailing restructuring framework — we would anticipate an increasingly drawn-out resolution process that lowers the present value of aggregate recoveries,” the ratings agency noted.