The U.S. territory of Puerto Rico did not pay $911 million of bond payments due July 1, as expected. At least $779 million of that is general obligation bonds, which are constitutionally-backed debt and supposed to be guaranteed.
However, Puerto Rico Governor Alejandro Garcia Padilla has issued a debt moratorium that allows the territory to default on the general obligation bonds also. This is not the first time Puerto Rico has defaulted on payments due on its debt. The Commonwealth started defaulting on smaller payments last year for several agencies. In May, the government defaulted on the majority of the $422 million of debt that it owed.
The island had $2 billion in bond payments that was due on July 1. In total, the Commonwealth and its agencies owe over $70 billion of debt.
News of the default comes just as President Barack Obama signed the Promesa legislation into law to help Puerto Rico deal with its debt load. Because the territory is not a U.S. state, it has not been able to file for municipal bankruptcy protection under Chapter 9. Promesa, which is the Puerto Rico Oversight, Management and Economic Stability Act, will establish a several-member federal board to oversee Puerto Rico’s finances. The board will be able to postpone lawsuits from creditors seeking payments owed and restructure the U.S. Commonwealth’s debt, including make bondholders go to court, if necessary, to lower the territory’s debt obligations. (The U.S. Senate had passed the bill on Wednesday, making it possible for Mr. Obama to sign the legislation.)
However, despite Promesa’s passing, there are those who are concerned that it is more a quick-fix solution rather than a law that can substantively deal with Puerto Rico’s financial crisis. U.S. Senator Bob Menendez, who has been a critic of the legislation, described it as a “Band-Aid on a bullet hole.”
Hedge funds, municipal bond investors, and bond insurance companies, which were promised repayment in the wake of a default, are among those impacted. According to Reuters, of the general obligation debt that was due July 1, National Public Finance Guarantee insures approximately $173 million, Ambac insures $40 million, and Assured Guaranty insures $184 million. According to Bloomberg, reporting Morningstar data, here are some of the other parties holding Puerto Rico securities:
· Municipal mutual funds: nearly $8 billion
· Hedge funds: $23 billion
· Investors in Puerto Rico: approximately $15 billion
A number of funds that are advised or managed by Solus Alternative Asset Management, Fore Research & Management, Brigade Capital Management, Fir Tree Partners LP, and Claren Road Asset Management have filed a motion to make sure that they can continue to challenge the debt moratorium that Governor Padilla issued.
While general obligation debt defaulted on July 1, the Puerto Rico Electric Authority (PREPA) said it would be able to pay the $415 million it owed on the same day. The island’s semi-public power utility is able to do this because of the restructuring deal it arrived at last year with a lot of its creditors. The debt that is due is going to be paid using bond sale proceeds and operational funds.
Puerto Rico Municipal Bond Fraud and Investor Losses
Since 2013, our Puerto Rico bond fraud lawyers have been working with investors through FINRA arbitration to recoup their losses. Many of our clients were encouraged to invest heavily in Puerto Rico by brokers who worked for UBS Puerto Rico (UBS-PR), Banco Santander (SAN), and Banco Popular. We represent clients in Puerto Rico and in the U.S. mainland. Shepherd Smith Edwards and Kantas, LLP is here to help investors recoup their Puerto Rico bond and closed-end bond fund losses. Contact us today.
Puerto Rico Says $911 Million in Payments Missed in Default, Bloomberg, July 1, 2016
Puerto Rico makes historic default, CNN, July 1, 2016
Obama Signs PROMESA Bill, Imposing Control Board on Puerto Rico, Democracy Now, July 1, 2016