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Puerto Rico Gov’t Evaluates Debt Moratorium, Receivership Options

By on February 17, 2016

SAN JUAN — Although it corresponds to fiscal year 2014, which ended June 30, 2014, the recently released draft of the commonwealth’s financial report also includes its fair share of discussion over Puerto Rico’s worsening fiscal situation and what could lie ahead for the island as it continues to maneuver through an unrelenting cash crunch.

The unaudited 370-page document made public Tuesday reiterates the possibility of implementing measures that could affect the island’s creditors, such as additional and more significant defaults, and even having certain public entities seek relief through receivership if the commonwealth fails to improve its financial condition in the immediate future.

“[Public] entities and/or the Commonwealth may need to seek relief under existing or potential future laws regarding receivership, insolvency, reorganization, moratorium and/or similar laws affecting creditors’ rights, to the extent available, and may resort to other emergency measures including nonpayment of debt obligations,” the report states.  

Treasury Secretary Juan Zaragoza and La Fortaleza Chief of Staff Grace Santana

Treasury Secretary Juan Zaragoza and La Fortaleza Chief of Staff Grace Santana

It also sheds light on a wide range of issues, from the commonwealth’s severely underfunded pension systems, to the Government Development Bank’s (GDB) critical condition and the uncertainty over debt-service payments during the rest of the fiscal year.

On Wednesday, La Fortaleza Chief of Staff Grace Santana said the administration is already analyzing the various emergency measures it could eventually make use of, including having Puerto Rico lawmakers approve legislation to declare a moratorium on debt payments.

The government bank faces a $423 million debt payment due May 2, while it continues to run dangerously low on cash. In July, the central government has roughly $800 million due on its general obligations (GOs), for which it has already begun clawing back funds, or using previously pledged revenue to pay other obligations, for its payment.

Still, serious concerns have been raised over the GDB’s ability to meet its May payment while keeping its operations afloat. Moreover, the report acknowledges that even with the clawbacks, the government may not have sufficient funds to fully cover its GO payment due in July.  

When asked about the possibility of placing some of the island’s financially battered public entities under receivership, she noted that many options are being evaluated to implement them — if necessary. The draft highlights the “substantial doubt” that remains over the ability of the central government and a majority of its instrumentalities to keep operating given their current fiscal health.

Meanwhile, government officials continue to urge Congress to promptly act over the Puerto Rico issue, particularly by providing access to a debt-restructuring mechanism that could help the island avoid this summer’s bleak scenario. While House Speaker Paul Ryan (R., Wis.) has said the lower chamber expects to act by the end of March, other GOP members have asked for additional financial information, including the commonwealth’s audited statements, before moving forward on the matter.

Most recently, the chair of the Senate Finance Committee, Orrin Hatch (R., Utah), sent a letter to the governor asking for a host of information to be delivered by March 1, including the fiscal 2014 financial audited statements.

Santana said Tuesday that one of the reasons for releasing the draft of the financial report is to provide more information to members of Congress and Puerto Rico lawmakers. Still, she echoed comments made by Gov. Alejandro García Padilla in stating that there is no excuse for congressional inaction.

As for Hatch’s request for the audited statements, the chief of staff conceded this won’t be possible by the March 1 deadline. “They are asking us for a clean opinion [on the audited statements], and we know this will not happen,” she said, adding that the audited statement is not expected to be completed until at least the end of the March.

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