Puerto Rico halted deposits into the fund that pays its general-obligation bonds and one of its agencies defaulted for the first time, marking an escalation in the island’s fiscal crisis.
Puerto Rico disclosed in a filing with the Municipal Securities Rulemaking Board Monday that it’s temporarily suspending monthly payments into a fund that covers its $13 billion of general-obligation debt.
The announcement came after the Caribbean island paid just $628,000 of what was due on securities sold by its Public Finance Corp. because the legislature didn’t provide enough money, Melba Acosta, the president of its Government Development Bank, said in a statement. About $58 million of interest and principal was due.
“They’re clearly not really interested in working with bondholders,” said Daniel Solender, who helps manage $17 billion as head of munis at Lord Abbett & Co. in Jersey City, New Jersey. “They have a political agenda, it seems like.”
Puerto Rico’s crisis has been building since late June, when Governor Alejandro Garcia Padilla said the commonwealth can’t afford to repay the $72 billion it owes as the economy struggles and residents leave for the U.S. mainland. His administration is pushing to renegotiate its debts, saying investors need to share in the sacrifice as he seeks to steady the island’s finances.
The island’s bonds have tumbled amid speculation that it won’t be able to pay what it owes on time and in full. Officials have yet to say which securities may be affected as they plan to release a restructuring proposal by Sept. 1.
Puerto Rico defaulted on the Finance Corp. bonds because lawmakers failed to provide the funds as they worked to close a budget shortfall. The securities are paid for with money appropriated by the legislature, unlike other bonds with a claim on tax money.
Standard & Poor’s said the failure to make the full payment shows that conserving cash has taken priority over maintaining access to the bond market. The ratings company said the default may impeded the government’s ability to borrow as it risks running out of money “in the next few months.”
“We believe the default signals severe liquidity distress, whereby Puerto Rico must now choose among which financial obligations it can honor, and presages other possible defaults as liquidity becomes further constrained during the next few months,” S&P said in a statement Monday.
Puerto Rico securities have been trading at distressed levels for two years, even though with the highest legal claim to the commonwealth’s money. General obligations maturing July 2035 and originally sold in March 2014 at 93 cents on the dollar traded Monday at an average price of 69.3 cents on the dollar, data compiled by Bloomberg show. The average yield was 12.1 percent.
Acosta, the island’s top debt official, said it’s being forced to balance obligations to bondholders against the need to maintain services for its citizens.
“This was a decision that reflects the serious concerns about the commonwealth’s liquidity in combination with the balance of obligations to our creditors and the equally important obligations to the people of Puerto Rico to ensure the essential services they deserve are maintained,” Acosta said in a statement.