Puerto Rico Lists Debt-Service Moratorium as Risk in 2016

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Puerto Rico warned it could place a moratorium on debt payments or put revenue from public corporations toward general obligations next fiscal year if the government can’t cut spending or generate more revenue.

Junk-rated Puerto Rico needs to sell as much as $2.9 billion of bonds backed by oil taxes to raise money for its Government Development Bank, which lends to the U.S. commonwealth and its localities. Without that borrowing, the government and the GDB may deplete their cash by Sept. 30, according to a quarterly filing posted Thursday on the Municipal Securities Rulemaking Board’s website.

The island may need to take emergency measures in the fiscal year beginning July 1 that could include “a moratorium on the payment of debt service, a debt adjustment, or the utilization for the payment of the commonwealth’s debt service of certain taxes and other revenues previously assigned by law to certain public corporations to secure their indebtedness.”

The report shows that Puerto Rico may be moving toward becoming the largest issuer to default in the $3.6 trillion market for city and state debt, said Bob Donahue, a managing director at Municipal Market Analytics.

“Puerto Rico is inching closer to the cliff,” said Donahue, whose company is based in Concord, Massachusetts. “There’s increasing uncertainty about where they’ll land and where this is all headed.”

Folly Decried

The language of the filing contrasts with what Governor Alejandro Garcia Padilla said in his April 30 State of the Commonwealth speech, when he rejected the idea of Puerto Rico’s not repaying its debts.

“Sometimes we talk about the possibility of not paying our debts -- this is folly,” Garcia Padilla said. “Don’t believe that we have only contracted debt with wealthy investors and foreigners. Our debt is also with Puerto Ricans who have put their savings in our bonds.”

Puerto Rico’s economy has struggled to grow since 2006. The commonwealth and its agencies owed $72 billion as of March 31, according to the report. The securities have traded at distressed levels for more than a year thanks to concern that the island of 3.5 million won’t be able to repay its obligations on time and in full.

Since Feb. 5, former International Monetary Fund officials Anne Krueger, Ranjit Teja and Andrew Wolfe have been reviewing the island’s economic and fiscal stability, according to the quarterly report posted Thursday. Their work will include an analysis of the sustainability of the island’s public-sector debt, and they’re set to deliver a draft of their conclusions this month, according to the report.

Deficit Projection

The commonwealth projects a $191 million deficit in the fiscal year ending June 30, after the government tapped $344 million of bond proceeds to balance its spending plan. Economic indicators show that the island’s gross national product may contract in fiscal 2015 after shrinking 0.9 percent last year, according to the report.

Puerto Rico’s pensions are also running out of cash. Assets of the government’s three retirement funds may be depleted in the next three to six fiscal years unless the government contributes more, according to the report.

Puerto Rico may need to make repayment of general-obligation debt and bonds of the Government Development Bank a priority over the obligations of public corporations, Donahue said. Many local credit unions own GDB debt, he said.

“It’s become clear that failure to pay on certain bonds would have more systemic repercussions to individuals and to financial institutions on the island,” Donahue said.

Puerto Rico general obligations maturing in July 2035 traded Friday at an average of 79.27 cents, to yield about 10.5 percent, according to data compiled by Bloomberg. That’s up from 79.19 cents Thursday. The yields reached 10.74 percent May 1, the highest since the debt first sold in March 2014, after lawmakers rejected a tax overhaul on April 30.

The commonwealth has hired Birmingham, Michigan-based Conway MacKenzie Inc. to analyze Puerto Rico’s liquidity, according to the report.

For more, read this QuickTake: Puerto Rico's Slide

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