Puerto Rico Willingness to Pay Test Coming Sooner Than Expected

  • Government Development Bank bond is guaranteed by Puerto Rico
  • GDB bond matures Dec. 1 with $357M of GO interest due Jan. 1

Puerto Rico is only eight weeks away from letting investors know whether the commonwealth will live up to its pledge to use all legally available resources to pay off bonds as the Caribbean island’s cash dwindles.

The Government Development Bank, which handles funding for the island, has $267 million of bonds maturing Dec. 1 that Puerto Rico assures repayment on through what’s known as a general obligation guarantee, according to bond documents. The commonwealth doesn’t have traditional general obligation payments due until Jan. 1. Overall, the bank owes $354 million of principal and interest on Dec. 1. MBIA’s National Public Finance Guarantee Corp. insurers the GDB bonds.

Puerto Rico officials are negotiating with investors and insurance companies regarding the GDB bonds as Governor Alejandro Garcia Padilla’s administration has said the island may run out of cash by November. The December payment and also $357 million of general-obligation interest due Jan. 1 are the commonwealth’s near-term debt priorities, Melba Acosta, president of the GDB, said in San Juan on Friday.

“We cannot rush the negotiations,” Acosta said after a journalism workshop. “They’re going to happen when they’re going to happen. Certainly the Dec. 1 and the Jan. 1 are a priority for us because they are GOs.”

Agency Default

If Puerto Rico fails to repay the GDB bonds due Dec. 1, it would be the first default on commonwealth-guaranteed debt. While one of its agencies, the Public Finance Corp., has skipped payments on its bonds since August, those securities were only backed by legislative appropriations, a much weaker lesser guarantee. Puerto Rico and its agencies owe $73 billion. The commonwealth is seeking to restructure a portion of its obligations by delaying principal payments for five years and lowering the total debt load through a voluntary exchange of new debt.

If the administration fails to get relief from bondholders and insurance companies by December or get a short-term loan from a bank or other funding source, officials will be forced to cut back on expenses “dramatically,” Sergio Marxuach, public-policy director at the Center for a New Economy, a research group in San Juan, said last week in an interview on the island.

“If you don’t get some sort of deal, the situation is going to be very difficult,” Marxuach. “Suppliers will probably be left on the hook. You may have to furlough employees without pay.”

Bond Insurers

To help preserve cash, Puerto Rico has skipped setting aside money every month for the Jan. 1 general-obligation payment. The commonwealth has also delayed tax rebates and slowed its payments to suppliers.

General obligations originally sold at 93 cents on the dollar and maturing July 2035, the most actively-traded Puerto Rico security in the past three months, changed hands Monday at an average 74.7 cents on the dollar, data compiled by Bloomberg show. That’s down from 77.3 cents on June 26, the last trading day before the governor said that Puerto Rico would seek to restructure its obligations.

Wells Fargo & Co. held $72.8 million of the GDB bond maturing Dec. 1, as of Aug. 31, while Alpine Woods Capital Investors held $43.7 million, as of July 31, Bloomberg data show. Lyle Fitterer, who helps oversee $39 billion of munis at Wells Fargo Capital Management in Menomonee Falls, Wisconsin, is betting the bonds will be repaid through the GDB or bond insurer MBIA. Any negotiations with the GDB regarding the bonds are through the insurance company, he said.

“We’ve decided to play it via insured debt where we’re comfortable with the claims-paying ability” of the insurers, Fitterer said.

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