Puerto Rico Faces "Public Unrest" As Cash Crunch May Leave Government Workers Unpaid

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Heavily indebted Puerto Rico was due to meet with representatives of its creditors on Friday in a desperate attempt to forge ahead with a plan to restructure some $72 billion in debt. No offer is expected to be made at the meetings in New York, but the commonwealth’s Government Development Bank says it hopes to provide creditors’ advisors with greater clarity on "the proposed restructuring process,” which GDB says “is a comprehensive plan that will benefit all parties while supporting the creation of a sustainable path forward.” 

As Reuters notes, “creditors have been resistant to cuts to their repayment, insisting that Governor Alejandro Garcia Padilla's administration do more to curb spending, boost government efficiency and promote economic growth.” 

The GDB is facing a $354 million principal and interest payment on December 1 - some $270 million of that is GO debt guaranteed by the National Public Finance Guarantee Corp. Defaulting on that is bad news and as Moody’s warned earlier this month, a missed payment on the commonwealth’s highest priority obligations “would likely trigger legal action from creditors, commencing a potentially drawn-out process absent swift federal intervention.” 

Another $303 million comes due one month later on January 1. 

GDB called Friday’s meeting with consultants and advisers “part of our continued effort to maintain a constructive and open dialog with our key stakeholders" while a spokesperson for the governor promised Puerto Rico is doing everything in its power to make the December 1 payment although Padilla has repeatedly made clear that if it comes down to defaulting or cutting off services to the people, bondholders will be out of luck.

Here's a bullet point summary of recent developments from BofAML:

  • On 6 November, Puerto Rico released its unaudited quarterly financial and operating report. In the report, Puerto Rico makes plain that it faces a near-term liquidity crisis, has too much debt, limited ability to raise revenues, and a near-decade-long recessionary economy. As a result, it is our opinion that it will likely need to restructure its debt and, absent a voluntary restructuring, will prioritize essential government services at the expense of debt-service payments.
  • Moody’s believes Puerto Rico is likely to default on at least a portion of its scheduled debt-service payments due 1 December, which include roughly $273mn of GDB debt guaranteed by the commonwealth.
  • Moody’s Analytics opines that, without near-term Congressional action, Puerto Rico may very well suffer an economic depression.
  • The US Senate Judiciary Committee scheduled a hearing on Puerto Rico’s financial crisis for 1 December. The Committee’s Chairman stated that allowing a debt restructuring without requiring structural and fiscal reform would be throwing away taxpayer money.
  • The Puerto Rican House and Senate approved significantly amended local control board bills from the one the Governor submitted, turning the proposed “control” board into an “advisory” board. The two bills will need to be reconciled.
  • The Puerto Rico Highway & Transportation Authority (HTA) cancelled $228.5mn of Ambac-insured bonds, a positive for Ambac-insured bondholders, as the insurer will have more claims-paying ability should Puerto Rico or its public corporations default

And here's BofA summing up:

In a nutshell, the commonwealth warns: it is facing a liquidity crisis, set to run out of cash this month, and revenues are coming in lower than expected; debt is too high, and needs to be restructured; the economy has been mired in a nearly decade-long recession, and economic factors limit Puerto Rico’s ability to raise revenues; healthcare and retiree costs, along with other essential government services are more important than paying debt service; and, with a lack of access to the capital markets and little room under the constitutional debt cap, it is unlikely that Puerto Rico will be able to borrow to finance its operations. 

Speaking of running out of cash, Height Securities analyst Daniel Hanson now says the acute liquidity strain may well mean that Padilla can't pay government employees and you know what that means: social unrest.

"Puerto Rico’s liquidity strains are 'serious' and will likely create 'greater levels of public unrest' into year-end," Hanson said this week in a note, adding that the "island’s Treasury Single Account likely has negative cash balance, will make it 'nearly impossible' to meet all government payroll obligations over the next six weeks."

As for whether any of this can be avoided, a Senate judiciary committee headed by Iowa Republican Charles Grassley will meet on December 1 to discuss a legislative proposal to assist Padilla. As Bloomberg notes, "Republicans would prefer that Puerto Ricans solve the crisis on their own, but if they can’t, lawmakers will probably seek to impose 'something like' a federal control board."

But this will likely be too little too late. Expect a partial default and if the government can't make payroll, they'll be trouble in paradise. 

We close with a quote and a table from Moody's Analytics (via BofA). As you'll note, under the "pessimistic scenario," Puerto Rico is in for a long and painful ride.

According to MA, under this scenario, “[t]he government would have no choice but to severely cut spending and jobs, pushing the economy deeper into recession, and further undermining revenues and the government’s fiscal situation. This vicious cycle currently plaguing Puerto Rico will only intensify. Moreover, the territory’s standing in capital markets would be irreparably harmed."