Earlier today, we noted that it was decision time for Puerto Rico.
Staring down a $354 million debt payment, Governor Alejandro Garcia Padilla had to decide between defaulting on $273 million in GO debt (the portion of the payment guaranteed by the National Public Finance Guarantee Corp.) and holding onto cash the government needs to provide public services for the island’s citizens.
This time, we said, actually is “different.” Why? Because unlike August when the island paid only $628,000 of a $58 million payment, defaulting on GO debt would lead directly to litigation. Of course, as one creditor told Reuters, "even a default on the non-GO portion could result in litigation against the GDB. Everyone would sue. It would be really messy."
Yes, “really messy”, and no one likes a mess, which is why Padilla decided to screw over another group of creditors in order to avoid defaulting on the GO debt.
As Bloomberg reports, “Governor Alejandro Garcia Padilla signed an executive order to permit the redirection of revenue budgeted for highway and convention center bonds and other agencies to pay for debt issued or guaranteed by the commonwealth.”
Amusingly, Padilla announced the decision at today's Senate Judiciary Committee hearing during which lawmakers debated whether or not to allow certain commonwealth agencies to declare bankruptcy. The bondholders left out in the cold as a result of the "clawback provision," should have known better. "The commonwealth said in a Nov. 6 financial filing that it may take revenue already used to repay Highways and Transportation Authority bonds, convention-center debt, and Puerto Rico Infrastructure Financing Authority bonds and redirect that money to pay down general-obligation securities," Bloomberg notes.
Height Securities Daniel Hanson (who predicts that social unrest may be in the cards if Padilla can't make government payroll) says the affected bondholders effectively have no recourse. About the only thing they can do is check to make sure the money actually went to repay the GO debt: “There’s going to be a legal process here to validate that any claw back that has occurred is being used consistent with the payment of constitutional obligations."
Still, the diverted revenue may not be enough to cover all of the commonwealth's GO payments.
Moody's wasn't impressed: "The payment indicated the commonwealth is making an effort to avoid litigation and prevent further deterioration in relations with its creditors, [but we] continue to view default as likely on future commonwealth debt payments."
Obviously, this isn't a sustainable way to do business going forward and in case it's in any way unclear what's going on here, we'll leave you with what Padilla told Congress on Tuesday:
"Let us be clear: We have no cash left. This is a distress call from a ship of 3.5 million American citizens that have been lost at sea."