Puerto Rico Senate Passes Sweeping Moratorium on Paying Debtby and
General obligations, Cofina debt would stop paying investors
The measure has to pass the island's House of Representatives
Puerto Rico’s Senate approved a bill calling for a moratorium on a wide range of debt payments, including general-obligation bonds, through January 2017 in the latest escalation of the Caribbean island’s fiscal crisis.
The measure, passed around 2:30 a.m. local time, would allow Governor Alejandro Garcia Padilla to suspend payments on debt backed by the government, the island’s Government Development Bank and other public agencies, according to a copy of the legislation obtained by Bloomberg. That includes the Sales Tax Financing Corp., known by its Spanish acronym Cofina. A default on those obligations would be a first for Puerto Rico, which so far has only failed to pay on bonds backed by legislative appropriation and rum taxes.
The bill still has to be reviewed by the island’s House of Representatives on Tuesday after stalling there previously. It’s the culmination of months of posturing by commonwealth officials and bondholders since Garcia Padilla declared that Puerto Rico’s debts were unpayable in June 2015. It reflects the governor’s long-held position that the island can’t continue to pay creditors on time -- even those holding constitutionally guaranteed securities -- while still providing essential services to residents.
“We continue to believe there are political constraints on the consummation of a debt moratorium that impairs GO bonds, and, indeed, such an arrangement would appear to us to be wildly out of step with any reading of the local constitution,” Daniel Hanson, an analyst at Height Securities, a Washington-based broker dealer, wrote in a report Tuesday. “The reality is that Puerto Rico is an American jurisdiction, and its laws are not at the whims of political appetite.”
Non-constitutionally protected bond payments would be suspended immediately under the proposal, while those backed by the constitution would be halted starting July 1, when Puerto Rico owes $805 million on its general obligations. The bill would also prevent creditors from suing the commonwealth for defaulting through January 2017, the same as the moratorium period.
General obligations with an 8 percent coupon and maturing 2035 traded Tuesday at an average price of 66 cents on the dollar, the lowest since the bonds were first sold in 2014, data compiled by Bloomberg show. The average yield was 12.8 percent.
Investors holding general obligations had already been working with island lawmakers, excluding the governor, to come to a consensual plan, Andy Rosenberg, a lawyer at Paul Weiss Rifkind Wharton and Garrison, said in a statement. He represents a group of general-obligation bondholders in their negotiations with Puerto Rico and other creditor groups.
Lawmakers are considering separate legislation that would suspend principal payments on general-obligation debt for five years, while still paying interest during that time, according to a House lawmaker who asked for anonymity because the talks are private. The measure wouldn’t reduce the face value of the securities, the person said. Puerto Rico has about $13 billion of general-obligation debt.
“The governor has spent the last nine months rebuffing all overtures by the GO holders,” Rosenberg said in the statement. The deal proposed by investors “would give Puerto Rico additional liquidity by, among other things, deferring substantial principal payments. Most importantly, this consensual deal avoids a July 1 default on constitutional debt.”
The legislation also addresses the GDB, which is facing speculation that it’ll lapse into insolvency. The bank’s receivership process, liquidity and reserve requirements and payment obligations would be suspended indefinitely, according to Hanson. The bill seeks to split the entity into a “good bank” and “bad bank,” he said.
Hedge funds holding debt in the GDB sued on Monday to stop the bank from returning deposits to local government agencies as it faces a growing cash shortage. The funds, which include affiliates of Brigade Capital Management, Claren Road Asset Management and Solus Alternative Asset Management, accused the bank of seeking to “prop up” local agencies at the expense of other creditors. The GDB has a $422 million debt-service payment due May 1.
The Government Development Bank serves the dual purpose of providing financial support to local governments and acting as a financial adviser to the commonwealth. The funds, which say they hold a “substantial amount” of almost $3.75 billion in the bank’s outstanding debt, blamed the entity’s deteriorating condition on a “hopeless conflict” between loyalties to Puerto Rico and to creditors.