Puerto Rico bonds crash after “moratorium” raises default risk
Just a day after Governor Alejandro Garcia Padilla signed a law that enables him to temporary halt debt payments, dramatically raising the risk of widespread defaults, Puerto Rico securities had the biggest one-day drop in more than eight months.
Today’s plunge is the biggest decline since July 28, 2015, a day after PR indicated that it was set to skip interest and principal payments on some securities for the first time.
As The NY Times reports, Gov. Alejandro García Padilla of Puerto Rico on Wednesday signed a bill that would allow him to declare a state of emergency and give him authority to halt payments on the island’s crushing $72 billion debt.
The measures capped two days and nights of marathon debate in Puerto Rico’s legislature, where lawmakers from the main opposition party called any unilateral debt moratorium dangerous and members of the governor’s party insisted that doing nothing would be even worse.
“This legislation provides us with the tools to address the highest priority of needs — providing essential services to our people — without fear of retribution,” the governor said in a statement on Wednesday. He accused Puerto Rico’s creditors of hampering federal assistance by “misinforming the public and dissuading Congress from doing what is right for our 3.5 million American citizens.”
The Puerto Rican Senate approved the measure at about 3 a.m. Tuesday. The House, after becoming embroiled in a dispute over whether certain types of bonds should be excluded, approved it around 1 a.m. Wednesday.
The bill did not specify a starting date for a moratorium, leaving that decision to the governor. But a big debt payment, $422 million, is due on May 1, and there have been many signs that Puerto Rico is not able or willing to pay it.
That payment is due on bonds issued by the Government Development Bank, an institution that plays a critical role in the island’s financial affairs, including holding deposits of municipalities and other government entities. As recently as last week, holders of the bank’s debt were in talks about an agreement that would give the bank some breathing room if it failed to make the payment.
But those efforts broke off in the face of a flurry of revelations that the bank was insolvent, that it might be placed in receivership, and that it was swiftly moving deposits to other financial institutions, apparently to keep them from being frozen or drained away by frightened depositors.
The bill says the bank has just $562 million in cash. A moratorium would be intended, among other things, to help preserve that cash, so the bank can use it to finance the activities of other parts of the government.
The law also establishes a new framework for putting the development bank into receivership, and creating a “bridge bank” that would take over some of its deposits and obligations during the moratorium.
The situation was not helped by Puerto Rico Treasury Secretary Juan Zaragoza who said there was “absolutely” no way the Treasury will have the funds make the more than $700M payment due July 1.
There are $300M in checks made out to suppliers that are being held because the Treasury doesn’t have the funds, Zaragoza said
Estimates that between other central government debts and public corporations, the amount owed to suppliers of government goods and services is about $2B, Zaragoza said
‘Conversations’ with creditors continue but the pendulum appears to be swinging towards Puerto Rico’s restructuring,
Stephen Spencer, who represents some investors who have already agreed to restructure their bonds, said, “We intend to carefully review the legislation, but at this stage we believe that it may lead to violations of the terms of the agreement.”
He said that the administration last fall had hailed that restructuring as a model for others to follow, adding that the bondholders he represents should have been excluded from any coming moratorium, “rather than being cast into a state of uncertainty.”
And/or a US taxpayer-funded bailout…
In Washington, House Republicans seeking to rescue Puerto Rico prepared to release a revised plan that includes a federal oversight panel. The proposal has been contentious on the island, where the governor and his top advisers are increasingly at odds with investors over how to restructure the debt, most of it in the form of municipal bonds.
As we detailed yesterday, what was more troubling is that in a move similar to what we have seen in Greece, only this time a voluntary one on behalf of the island and not its vassal owners (as happened with Greece), the newly signed Puerto Rico Emergency Moratorium & Financial Rehabilitation Act also empowers the governor to order the financially battered Government Development Bank (GDB) to restrict the outflow of cash in a bid to stabilize its dwindling liquidity levels, which stood at roughly $560 million as of April 1, according to the bill.
In other words, capital controls.
This, incidentally, confirms what we said yesterday, when we concluded that “the situation is getting messier by the day with a compromise deal now seemingly impossible – absent a US government bailout – and meanwhile Puerto Rico’s money is running out, which will ultimately be the decisive catalyst that leads to the next step in the crisis.”
That moment may have just arrived.