Thursday, November 14, 2019

Puerto Rico Defaults on Over $800M of Constitutionally Protected Debt

By on July 1, 2016

SAN JUAN – Puerto Rico will cover only about $150 million of the $958 million in constitutionally guaranteed debt it owes Friday, according to the government. In all, it will miss $911 million out of the $2 billion in debt-service payments due.

“When I became governor, Puerto Rico was a colony of Wall Street,” Gov. Alejandro García Padilla told reporters Friday in La Fortaleza.

“There should be no doubt today that I have chosen to protect the Puerto Rican people, and that we have been telling the truth all along,” he added, noting how the recently released audited financial statements confirm the island’s fiscal woes.

Of the $958 million that carry the island’s full faith and credit, the government will miss $780 million worth of general obligations (GOs), while paying about $150 million of the $178 million owed in Public Buildings Authority (PBA) bonds.

The island’s fiscal authorities stated earlier Friday that “over $800 million” in debt guaranteed by the commonwealth will still be owed July 1. They added that the administration won’t use “clawed back” revenues to pay for this debt, and instead will leave the roughly $150 million on a separate account, while its final use has yet to be determined.

Meanwhile, municipal bond-insurance companies cover some of the payments that will be missed, meaning these would need to pick up the tab for any defaulted debt they insure.

As for the rest of the payments due Friday, or about $1 billion corresponding to several public entities, the government will meet almost all of them in full, although mostly by siphoning the entities’ debt-service reserves held by their trustees.

All things said, the commonwealth will default on roughly half of the $1.9 billion due July 1, including the $780 million in GOs and $77 million tied to the Infrastructure Financing Authority (AFI by its Spanish acronym).

On Thursday, García Padilla signed executive orders authorizing the government to miss payments on its constitutionally guaranteed debt, while also declaring moratoriums on certain obligations of the Highways & Transportation Authority (HTA), Convention Center District Authority, the Public Employees Retirement System, the Industrial Development Co. (Pridco) and the University of Puerto Rico (UPR).

Despite the executive orders, partial payments will still be made, although coming from debt-service funds already held by a trustee. In addition, the orders seek to preserve cash and protect against potential legal action by creditors.

“Today, with these measures and [the Puerto Rico Oversight, Management and Economic Stability Act’s (Promesa)] federal restructuring authority in place, the Commonwealth is finally in a position to return to prosperity,” reads a government statement, adding that the administration seeks to avoid a government shutdown.

“Today, Puerto Rico is protected against creditors’ actions, and the lawsuits they have already filed or could file in the future,” the governor said in reference to the recently enacted federal legislation.

Puerto Rico’s fiscal situation on June 30, the last day of fiscal year 2016, was “dire,” with only about $200 million in cash in its operating account, according to the government’s statement. It warns it would need to continue taking emergency fiscal measures over the next six months to avoid depleting its liquidity.  

Even after the implementation of the latest fiscal orders, the administration warned about how dangerously low the government’s liquidity position will be through the rest of the year, according to the statement.

GDB Chairwoman Melba Acosta, Secretary of State Víctor Suárez, Gov. Alejandro García Padilla and Chief of Staff Grace Santana

GDB President Melba Acosta, Secretary of State Víctor Suárez, Gov. Alejandro García Padilla and Chief of Staff Grace Santana (Inter News Service)

No Use Yet For Clawbacks 

Meanwhile, roughly $150 million will continue to sit on a “clawback account” held in a private bank. These are monies taken since late last year from some of the island’s public entities originally pledged to pay for their debt. An additional $140 million in clawed back monies are deposited at the GDB, according to the government’s audited statements.

When asked by Caribbean Business whether the $140 million held at the GDB are liquid, officials conceded they are not, while they fall under cash-outflow restrictions in place at the troubled bank. 

Under its constitution, Puerto Rico can take control of previously pledged revenues, but only to service its constitutionally guaranteed debt if no other monies are available.

After triggering the executive clawback orders Nov. 30, the administration used about $160 million of these revenues to meet more than $400 million in payments due Jan. 2 on commonwealth-guaranteed debt.

Justice Secretary César Miranda has argued that a court could allow Puerto Rico, under its constitutional police power, to prioritize essential services to residents. “But if you ask me at this moment, and I’m pressed to give you an answer, I would have to say those monies [clawbacks] would need to go to pay constitutional debt,” he conceded to Caribbean Business a few months ago, during the presentation of the island’s debt-moratorium legislation.

“Even if the Commonwealth were to devote every last penny in [its operational account] and the Clawback Account to debt service on July 1, it would still owe holders of the public debt hundreds of millions of dollars,” reads Friday’s statement, which confirmed that the administration won’t use those funds to pay constitutionally protected debt due July 1.

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