Puerto Rico says will default on $779
million of senior debt
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[July 02, 2016]
By Nick Brown
SAN JUAN (Reuters) - Puerto Rico on Friday
said it will default on $779 million worth of constitutionally backed
debt, its most senior bonds, making good on threats that the island
would choose paying essential services for its citizens over obligations
Debt payments totaling just over $2 billion were due on Friday.
Governor Alejandro Garcia Padilla told reporters on Friday that
overall the U.S. commonwealth territory will not pay $911 million
worth of its obligations.
The U.S. territory's finances will soon come under a U.S. federal
oversight board after U.S. President Barack Obama signed into law on
Thursday a bill giving the island access to a debt restructuring
process, and implementing a halt on litigation arising from any
defaults on its $70 billion debt load.
"Today, Puerto Rico is protected against creditors’ actions," Garcia
The General Obligation (GO) debt, or debt that carries a GO
guarantee, is a category of debt that has not been defaulted upon by
any U.S. state in decades. Puerto Rico is not covered by Chapter 9
U.S. bankruptcy code which applies to municipalities.
Puerto Rico's Government Development Bank (GDB) said on Friday the
island would have just $95 million in cash at the end of the year
even after the defaults announced on Friday.
Puerto Rico's benchmark 2035 GO bond rose 0.25 points in price to
trade at 67.50 points, pushing the yield down to 12.519 percent.
On Thursday Garcia Padilla authorized Puerto Rico, under a locally
written debt moratorium law, to suspend some of the $2 billion in
debt payments due on Friday.
The developments on Friday represent the nadir of a decade-long
effort by Puerto Rico to avoid economic collapse. The island is
hamstrung by emigration and a 45 percent poverty rate.
"Even if the Commonwealth were to devote every last penny in the
(accounts) to debt service on July 1, it would still owe holders of
the public debt hundreds of millions of dollars," the GDB said in a
statement on Friday.
Some of the debt expected to be defaulted upon such as PBA (Public
Building Authority) ex-series L bonds will be mostly covered by
reserve funds held by the trustee bank. Nearly all of the payments
due on the Puerto Rico Infrastructure Financing Authority (PRIFA)
Bond Anticipation Notes (BANs) will be covered by reserve funds as
If some of the debt is covered by insurance policies, some
creditors could receive a portion of their payments.
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Puerto Rico's Governor Alejandro Garcia Padilla addresses the
audience at the capitol building in San Juan, in this February 29,
2016 file photo. REUTERS/Alvin Baez/Files
The GDB, Puerto Rico’s primary fiscal agent, said the island has
only $200 million in its operating account, and another $150 million
in revenue that was redirected in recent months away from other debt
Even if the island continues emergency measures like suspending
vendor payments and withholding contributions to a pension fund that
is already insolvent, the operating account will still run out of
cash in 30 to 60 days, the GDB said.
"We knew this day would come, that they would default, and it is
here. It was a good thing they passed PROMESA, even at the eleventh
hour," Ted Hampton, senior credit officer at Moody's Investors
Service, said, referring to the Puerto Rico Oversight, Management
and Economic Stability Act (PROMESA).
Late on Thursday the island's legislature approved an $8.9 billion
fiscal 2017 budget, which now awaits Garcia Padilla's signature.
In the wee hours of Friday, Puerto Rico released long-awaited
audited financial statements for fiscal year 2014, more than a year
The statements, audited by KPMG, showed, among other things, that
Puerto Rico’s largest public pension has exhausted its assets and is
now insolvent. Puerto Rico’s pensions have among the largest funding
gaps in U.S. history.
"When I entered office, Puerto Rico was property of Wall Street,"
Garcia Padilla said, adding: "Today, everybody concludes that we
have been telling the truth about Puerto Rico’s fiscal condition."
(Reporting by Nick Brown and a contributor in San Juan; Editing by
Daniel Bases and James Dalgleish)
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