The pressure is building on Puerto Rico as lawmakers struggle to ease a cash crunch days before the commonwealth’s electric utility confronts a bond payment it may be unable to make.
Prices of the junk-rated island’s newest general obligations reached a record low Wednesday after David Chafey, chairman of the territory’s Government Development Bank, said he’s resigning for personal reasons. The departure, which sparked worries about a leadership void, came as a group of hedge funds asked GDB officials and the governor for a meeting to discuss terms of a planned bond sale.
As legislators struggle to pass a budget in San Juan, the power utility is set to talk with creditors in New York Thursday about restructuring $9 billion of debt. It faces a July 1 bond payment and has insufficient reserves. Meanwhile, lawmakers are considering a bill that would allow the government to suspend monthly cash deposits for repayment of general-obligation debt.
“The fiscal and economic situation in Puerto Rico has reached a tipping point,” Cesar R. Miranda Rodriguez, the commonwealth’s attorney general, said in prepared testimony to a U.S. House committee Wednesday in Washington. “The situation is truly dire.”
Puerto Rico and its agencies are saddled with $72 billion of borrowings and dwindling financial resources as the local economy shrinks. With the fiscal vise tightening, Governor Alejandro Garcia Padilla returned to Puerto Rico instead of testifying to lawmakers Wednesday in Washington, El Nuevo Dia reported.
The cash crunch is pushing the commonwealth to delay tax rebates, slow payments to suppliers and borrow from a state-run insurance agency that provides disability compensation. The GDB, which lends to the commonwealth and its localities, had $778 million of net liquidity as of May 31, down from $2 billion in October.
The island’s House of Representatives on Tuesday approved a measure allowing the government to forgo setting aside cash every month to repay general obligations if Puerto Rico is unable to sell notes or oil-tax bonds, according to Rafael “Tatito” Hernandez, who chairs the House Treasury Committee. The Senate, which took up the budget legislation on Wednesday, also has to pass the bill.
“It’s all steps in the direction of making the credit weaker and creating more uncertainty as we get closer to the coupon dates,” said Daniel Solender, who helps manage $17 billion as head of munis at Lord Abbett & Co. in Jersey City, New Jersey.
Tax-exempt general obligations maturing in July 2035 traded Wednesday at an average of 77.6 cents on the dollar, the lowest since they were issued at 93 cents in March 2014, according to data compiled by Bloomberg.
The budget plan the House approved this week allocates money to repaying debt. Puerto Rico will pay investors in December and in June 2016 when general obligations come due, Hernandez said.
“We will keep our word on the general obligations,” he said.
Miranda, the attorney general for the island of 3.5 million people, called for congressional action to help the commonwealth, including allowing it to be treated as a state under Chapter 9 of the bankruptcy code. That would allow some Puerto Rico public corporations to file for bankruptcy protection, which they’re unable to do under current law.
A study released Wednesday by a former Federal Reserve economist had some other suggestions for how to assist the U.S. territory.
The Fed has legal authority to buy Puerto Rican debt as a U.S. municipality or a foreign country, Arturo Estrella, the former Fed economist and now a professor of economics at Rensselaer Polytechnic Institute in Troy, New York, said in the report.
The central bank could extend credit to Puerto Rico government corporations under the Federal Reserve Act, his paper concludes. The Fed and the U.S. Treasury also could provide financial planning assistance to Puerto Rico, according to the research, which was part of a project funded by the Fundacion Francisco Carvajal, in Guaynabo, Puerto Rico.