Puerto Rico’s debt crisis, already a year old, escalated to a new stage on June 30, when President Barack Obama signed legislation to put a federal oversight board in charge of the island’s finances and a restructuring of its $70 billion of debt. A day after the measure became law, Governor Alejandro Garcia Padilla skipped nearly half of $2 billion of payments due to bondholders, marking the territory’s biggest default yet.
1. What’s next?
Obama has until Sept. 15 to appoint the oversight board’s seven members, six of whom must come from a list recommended by leaders of the U.S. House and Senate. (An Obama selection from off the list would have to be confirmed by the Senate.) The board will oversee the commonwealth’s plans to halt its chronic budget deficits and determine how much its debt needs to be reduced.
2. How long will this process take?
Puerto Rico has been negotiating with creditors since 2015 in an effort to persuade them to voluntarily write down what they’re owed. Without the threat of a court-ordered restructuring, Garcia Padilla made scant progress. In its last proposal, Puerto Rico offered general-obligation bondholders 83.5 percent of what they’re due, with lesser amounts for owners of other securities. The control board’s progress may depend on how quickly it’s able to get timely financial information from Puerto Rico, whose most recent audited financial report is from 2014. Philip Fischer, head of municipal research at Bank of America Merrill Lynch in New York, said it’s unlikely that a restructuring would be finalized before the end of the year.
3. Will bondholders keep getting paid?
Some will, some won’t. An estimated $911 million of payments were missed on July 1, almost all of it due to owners of general-obligation bonds. Some $256 million of principal and interest is due on sales-tax debt in August, and the money to cover it is already in the hands of a trustee, according to S&P Global Ratings. The next big payment after that is $359 million of general-obligation interest due Jan. 1. Insurance companies that guarantee various Puerto Rico securities will cover some payments that the island skips.
4. What recourse is available to investors who are owed money?
For now, very little. The federal legislation shelters the island from the immediate consequences of default by putting a hold on creditor lawsuits until Feb. 15 or six months after the board is formed. That can be extended, if the board needs more time. In June, some hedge funds sued in an effort to kill Puerto Rico’s debt-moratorium law, which Garcia Padilla invoked to avoid making full payments in July.
5. What does this mean for Puerto Rico’s residents?
So far, Garcia Padilla has spared residents the brunt of the fiscal crisis, choosing default over massive government layoffs or cuts to health-care programs that he said would trigger a humanitarian crisis. Needed work on infrastructure has largely ground to a halt. Having an unelected board reviewing the government’s decisions will mean a loss of democratic control, which some residents have likened to colonialism.
The Reference Shelf
- A QuickTake explainer on Puerto Rico’s debt binge.
- A Bloomberg View column on now Congress’s work on Puerto Rico isn’t done.
- A Bloomberg News article on Puerto Rico’s record default.