Puerto Rico paid interest due on its general obligation bonds but diverted cash set aside for its infrastructure bonds, a move insurers deemed as illegal.
Earlier this week, Puerto Rico defaulted on about $37 million of debt payments while making about $1 billion in payments on GO debt.
The missed payments were comprised of $35.9 million of interest on rum tax bonds issued by the Puerto Rico Infrastructure Finance Authority and $1.4 million in interest on Puerto Rico Public Finance Corp. bonds.
S&P downgraded the PRIFA bonds to “D,” signifying default. Bond insurer Ambac Financial said it paid $10.3 million in interest due Monday on PRIFA debt, while Financial Guaranty Insurance Co. said it will cover 22% of the $6.4 million in interest it insures, according to Bloomberg.
Overall, Puerto Rico is wrestling with about $73 billion of debt and is urging Congress to grant its public corporations the ability to restructure its debts – power that states possess. U.S. House Speaker Paul Ryan asked congressional leaders to come up with a plan to deal with the commonwealth’s fiscal morass by the end of March.
Insurers object
Last week, the heads of Ambac and FGIC delivered a letter to Puerto Rico’s leaders objecting to the executive order authorizing the government to “claw-back” revenues pledged to PRIFA, calling it illegal.
The government used the funds to service the GO debt.
“We are gravely concerned by this improper act, which violates numerous statutory and state and federal constitutional provisions,” the letter said.
Ambac and FGIC collectively insure more than $863 million in outstanding PRIFA debt, which is secured by federal excise taxes on rum.
Even more concerning, the companies said, was the diversion of as much as $94 million in rum taxes prior to the executive order.
The Official Statements for the securities whose revenues were “clawed-back” say that the commonwealth can “interrupt the flow of revenues to bond holders only if all other commonwealth governmental revenues are together insufficient to pay GO debt service.”
The insurance companies point to Puerto Rico’s much publicized use of $120 million to pay government employees’ Christmas bonuses as a glaring example of a contravention to the indenture.
Bargaining maneuvers
Gov. Alejandro Garcia Padilla has said that going forward the commonwealth will prioritize debt payments. Puerto Rico’s constitution mandates the GO debt be paid before other obligations.
The president of Puerto Rico’s Government Development Bank said the move, in part, would help spur negotiations with creditors.
In a statement, S&P said even as it views Puerto Rico’s long-term financial situation as dire, the decision to default on the “relatively small $36 million PRIFA interest payment” is a bargaining ploy intended to encourage political help.
“We believe the decision to default on the PRIFA debt, and preserve current payments on GO debt is an indication of the commonwealth’s very weak cash position and was not done lightly, as it opens up the commonwealth to litigation.
“However, we also believe it shows Puerto Rico’s reluctance to default on GO debt where bondholders hold a particularly strong legal claim and could represent a shot across the bow to bondholders in ongoing restructuring talks, as well as serve as a signal to Congress that help is needed.”