Puerto Rico Invites Chaos as Debt Moratorium Upends Progressby , , and
Measure would give governor authority to suspend key payments
Republican Senator Hatch says move would be `disastrous'
Puerto Rico risked upending months-long efforts on Wall Street and in Washington to address the commonwealth’s fiscal crisis by authorizing the government to halt payments on a wide swath of its $70 billion debt.
Governor Alejandro Garcia Padilla signed a moratorium bill Wednesday, just hours after it won final passage in the legislature. It gives him authority to suspend payments through January 2017 on general-obligation bonds, sales-tax securities and debt from the island’s Government Development Bank and other public agencies. 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 appropriations and rum taxes.
“The commonwealth is insolvent and the situation requires responsible efforts to finding a solution,” Garcia Padilla said Wednesday in a statement. “This legislation provides us with the tools to address the highest priority of needs -- providing essential services to our people -- without fear of retribution.”
The decision marks an escalation of Puerto Rico’s fiscal crisis and complicates talks with creditors and U.S. lawmakers that have been dragging on since Garcia Padilla in June declared that the island’s debts were unpayable. The Puerto Rico Electric Power Authority, known as Prepa, already reached an agreement with bondholders that would lower its obligations. Representatives in Congress, after months of debate, drafted legislation last month that would help Puerto Rico restructure its debt.
Facing widespread defaults from the territory, Republicans and Democrats vowed to move swiftly to address the crisis. House Speaker Paul Ryan said the Natural Resources Committee is working to revise its legislation, which drew opposition from both bondholders facing debt write-offs and island politicians who said it would open the door to a federal takeover. The committee is set to hold a hearing on April 13.
“The House is committed to a responsible path forward that tackles Puerto Rico’s structural fiscal problems while protecting American taxpayers from footing the bill,” Ryan said in a statement.
The House’s top Democrat, Nancy Pelosi, said she’s hoping "bipartisan, consensus legislation" can be reached, but that Democrats believe aspects of the draft bill can still be improved.
Garcia Padilla has long-held that Puerto Rico can’t continue to pay creditors on time -- even those holding constitutionally guaranteed securities -- while still providing essential services to its 3.5 million residents. He welcomed the proposed federal legislation, but said “the price is too high” in how much control it would give the U.S. over the commonwealth, and previously threatened to call for a moratorium if a deal with investors couldn’t be reached.
Non-constitutionally protected bond payments could be suspended immediately under the island’s law, while those backed by the constitution could be halted starting July 1, when Puerto Rico owes $805 million on its general obligations. It also prevents creditors from suing the commonwealth for defaulting through January 2017, the same as the moratorium period.
The act drew criticism from representatives of bondholders, some of whom have been lobbying Capitol Hill to keep Congress from giving Puerto Rico legal authority to reduce its debt, as cities on the mainland can in Chapter 9 bankruptcy.
“Lawmakers have acted precipitously by allowing the governor to unilaterally impose debt payment moratoriums,” Stephen Spencer, managing director at Houlihan Lokey, an adviser to Prepa bondholders, said in a statement. He said the law may violate the terms of the negotiated agreement, which is “cast into a state of uncertainty.”
General obligations with an 8 percent coupon and maturing in 2035 traded Wednesday at an average price of 63.9 cents on the dollar, the lowest since the bonds were first sold in March 2014, data compiled by Bloomberg show. The average yield was about 13 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 on Tuesday. He represents a group of bondholders overseeing almost $5 billion of general obligations that released a plan on Tuesday that would put off principal payments for five years, providing debt relief to the island while averting a July default through a new bond deal.
Melba Acosta Febo, president of the GDB for Puerto Rico, said the bondholder proposal isn’t the comprehensive restructuring the island is looking for.
It “fails to solve the severe and real challenges that the commonwealth is now facing,” she said in a statement. “While this proposal would allow the commonwealth to ‘scoop and toss’ its GO obligations and pay GOs interest, it would do so at the expense of holders of all of the other creditors of the commonwealth, many of whom are residents of Puerto Rico.”
The U.S. Treasury Department echoed the GDB president’s push for a broad restructuring, saying the debt moratorium is another reminder of the severity of the island’s crisis.
“We have called on Congress to provide Puerto Rico with tools to achieve a lasting, workable solution and create a path to recovery,” said a Treasury spokesperson. “Only Congressional action can end this crisis.”
Some Puerto Rico investors who may see their payments halted said inaction among U.S. lawmakers led commonwealth officials to act on their own.
“With entrenched private institutions obstructing the legislative process in Washington, it is understandable that Puerto Rican leaders are taking steps to equip the island with the tools it needs,” said Susheel Kirpalani, a partner at Quinn Emanuel Urquhart & Sullivan, which is representing holders of senior sales-tax bonds, known as Cofinas. They “hope our fellow creditors acknowledge this dire reality and finally stop holding legislation hostage.”
Bondholders are likely to sue in response to the debt moratorium, Daniel Hanson, an analyst at Height Securities, a Washington-based broker dealer, wrote in a report Wednesday after the House vote. He said a majority of Puerto Rico issuers appear to have violated their creditors’ rights.
A legal battle between holders of general-obligation bonds and sales-tax debt will come sooner than previously anticipated, he said.
“The GDB appears to have made the concept of good faith negotiations nearly impossible, choosing an ideological crusade against creditors over a consensual technical solution to cash flow problems,” Hanson wrote. “We believe the commonwealth has inaugurated a new era of litigation.”