Puerto Rico Delays Some Bond Payments as Default Loomsby
GDB will exchange bonds to delay May 1 maturity by one year
Debt swap affects a portion of $422 million due on May 1
Puerto Rico said its Government Development Bank, which is operating in a state of emergency to preserve its dwindling cash, reached an agreement with some credit unions to delay $33 million of bond payments as the commonwealth rushes toward a potential historic default.
The pact only affects a portion of the $422 million that the bank owes on May 1. The GDB will exchange the $33 million in bonds for new debt that will mature May 1, 2017, Governor Alejandro Garcia Padilla’s administration said in a statement Friday. The terms of the agreement are available to other credit unions, called cooperativas, and investors, according to the statement.
The bank is still negotiating a possible debt exchange on all of its bonds, which would require the participation of all its creditors, according a the statement. The GDB, which structured the island’s debt sales, has $5.1 billion of debt. The governor’s office said Garcia Padilla will speak to the commonwealth in a televised address Sunday at 5 p.m. New York time.
“Apart from this private exchange, GDB continues to negotiate a potential transaction related to an exchange of all of GDB’s bond indebtedness, which would require the participation of all creditors of GDB (including the cooperativas),” the administration said in the statement. “The private exchange does not affect, or take the place of, those ongoing negotiations.”
No matter which route Puerto Rico takes, credit-rating companies see a default as inevitable. Moody’s Investors Service analysts said last week that any non-payment, even if it’s agreed to by creditors, constitutes a default in their eyes. S&P Global Ratings said a distressed-debt exchange or temporarily withholding interest is synonymous to default.
A GDB default would be the largest yet on Puerto Rico securities and would send a clear signal to investors and U.S. officials that the island doesn’t have enough money to keep paying its debts. Garcia Padilla will invoke a new debt moratorium law if the GDB is unable to delay the entire $422 million, Jesus Manuel Ortiz, a spokesman for the governor, said this week.
Puerto Rico and its agencies owe $70 billion after years of borrowing to fill budget shortfalls as the island’s economy contracted. Garcia Padilla is seeking to cut that debt load by asking investors to accept losses on their securities. The governor in June 2015 said the commonwealth was unable to repay all of its obligations. Since then, two agencies have defaulted on smaller debt payments.
Garcia Padilla declared a state of emergency for the GDB on April 9 to limit withdrawals from the bank only to fund health, public safety and education. The GDB has $562 million of liquidity, according to the debt-moratorium law.