Earlier this month, Puerto Rico narrowly avoided default by utilizing a revenue clawback end-around to make $354 million in debt payments. Some $273 million of the total due was tied to GO debt, meaning that had the island missed the payment, a cascade of messy litigation would likely have followed.
Subsequently, PREPA - the island’s power utility - managed to secure a deal with creditors and the monolines that will allow for the restructuring of $8.2 billion in debt. Should the agreement materialize, it would be the largest restructuring in muni history.
While some believe the PREPA deal could serve as a template for restructuring the rest of the commonwealth’s $70 billion in debt, it also presents a problem. Effectively, it proves that there are other options besides bankruptcy and that undermines Governor Alejandro Padilla’s plea to Congress. “The argument that’s been made in favor of Chapter 9 is that it’s the only means through which an organized, non-chaotic approach to Puerto Rico’s debt crisis can be put in place,” Mark Palmer, a managing director at BTIG LLC told Bloomberg last week, before noting that the PREPA deal “would argue otherwise.”
Still, Padilla and others contend that restructuring the rest of the island’s debt would be exceptionally difficult. “The vast number of creditors with differing interests across all issuing entities would result in negotiations that are lengthy, costly and chaotic,” the Governor says. “Access to legal, broad restructuring authority would allow us to undertake these in an orderly manner.” A full account of the country's debt (courtesy of Bloomberg) is presented below.
On Tuesday, Padilla warned that a full payment of the nearly $1 billion that comes due on January 1 will be “almost impossible.” “To make a total payment will be almost impossible,” the Governor said. “If a partial payment is made: what bonds should we pay? It is an assessment that is being done. It is highly unlikely that there will not be default, in whole or partially.” Here's Reuters with more:
Puerto Rico first defaulted on its debt in August and has warned that more defaults are coming. It has an upcoming debt payment of around $1 billion due Jan. 1.
"It is very, very unlikely there is no default," Garcia Padilla said. "Very unlikely. In full or part."
Puerto Rico officials have given clear warnings of defaults. Garcia Padilla said earlier in December that the island "will default in January or in May," and Melba Acosta, president of the island's Government Development Bank (GDB) was quoted in local media last Friday saying the island is expected to default on a Jan. 1 payment on its Infrastructure Finance Authority (PRIFA) bonds.
Garcia Padilla on Dec. 1 granted the U.S. territory power to take revenues from public agencies such as the highways agency HTA, PRIFA and its convention center district authority via "clawbacks".
While the HTA and convention center have said in filings that they expect interest due Jan. 1 will be paid in full from funds in deposit, PRIFA has only said that funds on deposit would be applied to the Jan. 1 payment.
Of the $957 million due in January, $357 million is GO debt. Here's the breakdown, via Bloomberg:
And here's a look at the bigger picture via Barclays:
And so, Puerto Rico defaults (again) in T minus 9 days. As for Padilla, he's doing his best.
"If I have the money, and I don't use it to pay the government's obligations, then we lose the case in court in two seconds," he said this week. "Because if the money is there, I have to use it to pay."
Yes, you "have to use it to pay" - unless of course you decide to spend $120 million on Christmas bonuses, which Padilla did this week. Our only question now is whether those bonuses will be "clawed back" just like revenue from Infrastructure Financing Authority, the Highways & Transportation Authority and the Convention Center District Authority.
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- Puerto Rico Sales Tax Financing Corp.: $15.2 billion. The bonds, known by the Spanish acronym Cofinas, are repaid from dedicated sales-tax revenue. A $6.2 billion portion of the debt, called senior-lien, is repaid first. The remaining $9 billion, called subordinate-lien, get second dibs. $1.2 million of interest is due in February and again in May. Senior Cofinas maturing in 2040 last traded for an average yield of 9.5 percent, while subordinate ones yielded 18 percent.
- General-obligations: $12.6 billion. The debt backed by the commonwealth’s full faith and credit. The island’s constitution says general obligations must be repaid before other expenses. Puerto Rico owes $357 million of interest in January and an additional $805 million of principal and interest is due July 1. Securities due in 2035 last traded for an average yield of 11.5 percent.
- Puerto Rico Electric Power Authority: $8.2 billion. Prepa, as it’s called, is the island’s main supplier of electricity and repays the debt from what it charges customers. The utility owes $196 million of interest in January and $420 million of principal and interest July 1. Prepa is negotiating with bond-insurance companies after reaching an agreement with some of its bondholders, who agreed to take a 15 percent loss. Bonds maturing in 2040 last traded at an average yield of 9.2 percent.
- Puerto Rico Government Development Bank: $5.1 billion. The GDB lends to the commonwealth and its localities. When those loans are repaid, the bank can pay off its debt. The bank owes $354 million in December and $422 million in May. Federally taxable bonds maturing in 2019 last traded for an average yield of 57 percent.
- Puerto Rico Highways & Transportation Authority: $4.6 billion. The highway agency repays its debt with gas-tax revenue. It owes $106 million of interest in January and $220.7 million of principal and interest in July. The commonwealth has the ability to divert revenue that cover some highway bonds to pay its general-obligation securities, if there are no other available resources, according to the island’s most recent financial disclosure. Bonds maturing July 2028 last traded for an average yield of 32 percent.
- Puerto Rico Public Buildings Authority: $4.1 billion. The PBA bonds are repaid with lease revenue that public agencies pay for their office buildings. The agency owes $102.4 million of interest in January and $208 million of principal and interest in July. Bonds maturing 2042 last traded for an average yield of 10.4 percent.
- Puerto Rico Aqueduct & Sewer Authority: $4.1 billion. The utility, called Prasa, supplies most of the island’s water. The debt is repaid from water rates charged to customers. The water agency owes $86.5 million of interest in January and $135.1 million of principal and interest in July. Bonds maturing in 2042 last traded at an average yield of 8.7 percent.
- Puerto Rico Pension-Obligation Bonds: $2.9 billion. The taxable debt was sold to bolster the island’s nearly depleted pension fund. The bonds are repaid from contributions that the commonwealth and municipalities make to the retirement system. The system pays $13.9 million of interest every month in this budget year. Securities maturing in 2038 last traded for an average yield of 22 percent.
- Puerto Rico Infrastructure Financing Authority: $1.9 billion. Called Prifa, the agency has sold the island’s rum-tax bonds. These are securities repaid from federal excise taxes on rum made in Puerto Rico. Prifa owes $37.2 million of interest in January and $77.8 million of principal and interest in July. Bonds maturing in 2046 last traded for an average yield of 28 percent.
- Puerto Rico Public Finance Corp.: $1.09 billion. The bonds are repaid with money appropriated by the legislature. The agency has defaulted every month since August on its debt-service payments because lawmakers failed to allocate the funds. It owes interest every month, the largest being a $24 million payment in February. Bond maturing in 2031 last traded for 7 cents on the dollar, according to trade reports. The yield wasn’t disclosed.