Although Puerto Rico failed to make a $58 million bond payment, some analysts think Public Finance Corporation bondholders may ultimately be made whole.
On Monday, the commonwealth was due to make $483 million in debt payments and paid all of it except $58 million owed to creditors of its Public Finance Corporation. The government did make a partial interest payment to PFC bondholders of $628,000.
Also Monday, the government said it would temporarily suspend payments into a fund that covers $13 billion of general obligation debt.
The failure to pay PFC creditors is the first time in Puerto Rico’s 117-year history as a U.S. territory that it has missed a debt payment. The move was widely regarded as part of the government’s negotiation strategy in talks with creditors.
Setting the stage
In June, Gov. Alejandro Garcia Padilla warned that without economic growth, the commonwealth would be in a “death spiral” and its debts, which total about $73 billion, are “not payable.”
Pedro Pierluisi, Puerto Rico’s nonvoting representative in Congress, said the PFC payment could have been made and the government is posturing.
“Regardless of the fact that the constitution of Puerto Rico does not specifically guarantee this payment, it is the moral obligation of our government, at the very least,” Pierluisi told CNBC Monday.
“It is our name, our creditworthiness at stake, and the funds were available. It’s just a matter of the strategy that the government is following to force creditors to come to the table to negotiate,” he said.
Pierluisi, who is a political opponent of Garcia Padilla and is reportedly considering a run for governor next year, said he opposes the government’s strategy.
“You should be making your payments and, at the same time, to the extent you need to restructure any obligations, then sit down and negotiate. But you shouldn’t fail to make payments.”
John Mudd, an attorney and legal analyst in Puerto Rico, said he thinks the legislature is legally bound to budget the funds necessary to pay bondholders and ultimately, they will be paid in full.
“They sue. They can win or they lose. If they win, then why would you restructure if you’re going to win the case? This is the best (easiest) bond for Puerto Rico not to pay. Because it has no (revenue) stream, no lock box. The legislature has to budget the money,” he said in a televised interview.
Puerto Rico’s numerous issuers are struggling with about $73 billion in debt, a figure as high as New York’s, though its economy is a fraction of the size. The commonwealth has faced a decade-long recession, while an estimated 50,000 citizens leave each year.
The debt problems have spawned lawsuits and competing analyses of whether, in fact, Puerto Rico needs to restructure its debt.
A government turnaround plan is expected to be unveiled by Sept. 1.