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Here We Go Again

By on July 28, 2016

A month after defaulting on about $800 million, mostly corresponding to constitutionally protected, general-obligation (GO) debt, the Puerto Rico government will be servicing most of its debt payments due on Aug. 1.

Holders of Sales Tax Financing Corp. (Cofina by its Spanish acronym) paper and Employee Retirement System (ERS) pension bonds would all receive their payments due next week, sources confirmed to Caribbean Business. Moreover, small interest payments on certain Highways & Transportation (HTA) and P.R. Industrial Development Co. bonds would also be met.

In all, more than $300 million would be paid across these credits, although tapping into debt-service reserve accounts to meet these payments. Trustees already have funds on hand and will in turn use these come Aug. 1 to meet the respective payments.

As for the Government Development Bank (GDB), the bank’s management was still pondering as of presstime Tuesday whether the troubled institution will once again pay interests due—more than $20 million—despite Gov. Alejandro García Padilla’s moratorium order.image

Sources told Caribbean Business the GDB’s board of directors would once again meet this week to decide whether to continue meeting interest payments to its creditors—a move aimed at protecting local bondholders, who mostly own this debt, officials have previously said.

La Fortaleza would need to green-light any interest payment to be made by the bank, as the troubled institution continues to operate under a moratorium order on its debt, along with cash-outflow restrictions amid its strained liquidity levels.

On the default side come Aug. 1, roughly $11 million corresponding to Puerto Rico Infrastructure Financing Authority’s bond anticipation notes would be missed, as well as a $1.5 million interest payment on GO bonds, at least one source told this newspaper.

Moreover, roughly $50 million would add to the more than $90 million that has already been missed to date on Public Financing Corp. (PFC) bonds—which first defaulted a year ago.

While the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) provides that the fiscal control board will decide when and if the government will meet interest payments on its constitutionally guaranteed debt, it is unclear what happens during the time the board is not constituted.

Despite Promesa’s legal shield, various creditors have taken the matter to court, alleging the García Padilla administration has failed to abide by the recently enacted federal statute when it decided to default last month on roughly $350 million in interest payments on GO bonds.

What’s more, some creditors and pundits have called into question the decision to pay interest on such less-secured paper as the GDB, while top-notch bonds, i.e. GOs, are not.

For its part, except for GDB paper, administration officials argue that debt payments being met nowadays are done by siphoning through reserve accounts held by trustees, who have no other choice but to use available funds to cover for payments due.

Based on several executive orders, Gov. García Padilla has “clawed back,” or redirected, most revenue sources used to service debt, citing a cash crunch that wouldn’t allow the government to provide essential services to citizens and pay for its debt at the same time.

One credit that has been ring-fenced from the administration’s clawbacks has been Cofina—which is viewed by some as a sterling credit thanks to a lockbox structure that takes a slice of the island’s sales tax even before the government can put its hands on it.

Yet, Cofina creditors’ fears of it being clawed back still linger, and have been for quite some time. When the García Padilla administration entered office in 2013, it had plans to issue more sales tax-backed debt, and had lawmakers introduce amendments to Cofina’s pledged sales tax to be able to do so.

“When we tried to go to market again, doubts pertaining to Cofina began to surface. Is the sales tax ‘clawbackable’?” outgoing President & Chairwoman Melba Acosta recently told Caribbean Business during an exclusive interview.

The administration then went for the $3.5 billion general-obligation issuance—the last time Puerto Rico had access to such type of debt.

New fiscal plan on the way

Meanwhile, Gov. García Padilla’s fiscal squad is closing in on the release of a revised long-term fiscal & economic growth plan, aiming to present the incoming fiscal control board with the administration’s blueprint to fix the island’s woes.

It would be the third revision to the fiscal plan, which was unveiled last September and revised in January, this time spanning 10 years instead of the initial five-year term.

“The fiscal plan is being updated…. We have new data after the release of the [fiscal 2014] audited financial statements,” outgoing President & Chairwoman Melba Acosta recently told Caribbean Business.

However, she noted that the island’s new fiscal agent, the Puerto Rico Fiscal Agency & Financial Advisory Authority, is in charge of the development of this new revision.

An inquiry by Caribbean Business on changes to the new fiscal plan and when it would be released had yet to be responded to by La Fortaleza as of presstime Tuesday.

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