Puerto Rico's approved budget allocation for appropriation and Government Development Bank for Puerto Rico debt is 19% short of the amount requested by the governor, leading to a missed debt service payment by Puerto Rico Public Finance Corp. on Wednesday.
The working group for the economic recovery of Puerto Rico is due to make its recommendations as to how the $63 million reduction in payment from what the governor requested will be distributed among appropriation debt holders on Sept. 1. Those recommendations would then have to be approved by the legislature, according to a spokesperson in the Puerto Rico Senate.
In the meantime, the missed debt service by Puerto Rico Public Finance Corp. signaled the PRPFC — a subsidiary of the GDB — may default on a payment due Aug. 1.
That would be the first monetary default by an island entity after Gov. Alejandro García Padilla said Puerto Rico cannot pay its debts, setting the stage for a restructuring of as much as $72 billion.
In addition to the $275 million for appropriation and GDB debt the budget allocated $1.011 billion for general obligation debt, $117 million for commonwealth-guaranteed Administration for Infrastructure Financing debt, $46 million for the last payment for the fiscal year 2014-2015 tax and revenue anticipation note, and $26 million for some other debts, according to the Puerto Rico Office of Management and Budget.
Following its contractual obligations, PRPFC had been expected to transfer $93.7 million to the trustee for payments due in the fiscal year, according to a source familiar with the matter.
Holders of that debt may have no recourse.
"The legislature of Puerto Rico is not legally bound to appropriate funds for such payments," the first page of the Series 2004B PRPFC official statement said.
"The 2004 Series B bonds will not constitute an obligation of the Commonwealth of Puerto Rico or any of its political subdivisions or public instrumentalities (other than the corporation), and neither the Commonwealth of Puerto Rico nor any of its political subdivisions or public instrumentalities (other than the corporation) will be liable thereon," the official statement said.
"From the commonwealth's standpoint, defaulting on appropriation debt would be the least painful way to conserve cash as the government can claim it has no obligation to appropriate," said New Oak managing director Triet Nguyen. "Based on our reading of the bond documents, the bondholders have no right to compel payment" on PRPFC bonds.
The $94 million was to be used for debt service payments on just series 2012 PRPFC bonds and not other PRPFC bonds, according to Lilliam Maldonado, spokeswoman for Representative Jesús Santa Rodríguez, a member of the Puerto Rico House Treasury and Budget Committee.
As of March 31 the PRPFC had $1.09 billion of debt outstanding, according to the commonwealth's financial report.
The Puerto Rico government took steps to increase revenues by hundreds of millions of dollars and lower expenditures by hundreds of millions of dollars in the recently approved budget. However, the GDB has warned that due to its having inadequate funds actions constituting defaults on its obligations may start in September.
Of the non-transfer of funds, Joseph Rosenblum, director of municipal credit research at AllianceBernstein, said, "It's not surprising given how serious the liquidity position is and may very well foreshadow near-term additional steps to conserve liquidity."
Rosenblum added that he thought there was a consensus that of all the forms of Puerto Rico debt, the appropriation debt had the weakest security structure.
"Dishonoring appropriation debt of the Public Finance Authority cripples Puerto Rico's 'faith & credit' within the municipal debt market," said Richard Larkin, senior credit analyst at H. J. Sims.
In other Puerto Rico news, three members of the GDB's board recently resigned. According to Gov. Alejandro García Padilla, their terms ended in September and they resigned to allow others to take their spots early in what is likely to be a difficult financial period.
To replace the departed members García Padilla appointed two new members and promised to appoint a third soon.
