Puerto Rico issued a moratorium on Government Development Bank principal payments due Monday.
"Let me be very clear, this was a painful decision," Gov. Alejandro García Padilla said in a televised address Sunday. "We would have preferred to have had a legal framework to restructure our debts in an orderly manner. But faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice. I decided that essential services for the 3.5 million American citizens in Puerto Rico came first."
Puerto Rico has a total of $470 million in debt due Monday, of which $423 million is from the GDB, according to Moody's Investors Service. About $400 million of the GDB payments due Monday are principal.
A release from the GDB Sunday night indicated that it would pay interest but not principal Monday.
Puerto Rico over the weekend also announced two restructuring deals on the GDB debt, though significant obstacles remain to implementing the larger of the two.
The GDB released terms of the larger, preliminary $900 million deal Sunday night.
The El Vocero news site reports that hedge funds own most of the $900 million of notes in the deal. However, for the deal to be carried through, holders of 100% of GDB's debt would have to participate. As of August 2015 the GDB had $4.61 billion in debt.
"Without federal restructuring legislation, including the tools to bind non-consenting creditors, the transaction would be highly unlikely to reach the required participation levels," the GDB said.
In the second stage the note holders would have their face discount notes exchanged for new final notes whose par value would equal to 47% of the original notes' value. The final notes would be issued as part of a comprehensive restructuring deal of most of Puerto Rico's public sector debt, the GDB said.
The face discount notes would have a 5% interest rate.
However, interest payments would be made as a mix of payments in kind and cash through fiscal 2020, with the cash portion ramping up over time.
The interim bonds would be secured through first lien on the bank's existing sales tax and property tax municipal loan portfolio, accord to the bank. These have an approximate face value of $1.9 billion. The interim bonds would mature in 2040.
"To be very clear, this is but one piece in a complicated process that will require every commonwealth creditor to participate," said GDB President Melba Acosta Febo. "The time necessary to reach even an agreement on key terms with one quarter of a single issuer's bondholders demonstrates that, in the absence of federal legislation that gives Puerto Rico the tools it needs, the island will be condemned to a quagmire of economic stagnation with no relief, for which both 3.5 million American citizens and our creditors will bear the consequences."
On Friday night the GDB also announced an agreement with a group of Puerto Rico credit unions that hold GDB notes maturing Monday. In the deal the credit unions agreed to exchange their notes for new notes maturing May 1, 2017. The par value of the notes is $33 million. The GDB will make an interest payment on the notes Monday.
The credit unions, also known as financial cooperatives, generally have older and poorer depositors than Puerto Rico's banks.
Monday's payments and non-payments of debt may be a prelude to a much bigger default on July 1, when Puerto Rico's public sector bodies owe a total of $1.9 billion. Gov. García Padilla has made clear that he expects defaults on much of this debt.
Puerto Rico is seeking help through federal legislation that would put a retroactive stay on all suits concerning debt defaults and that would ultimately allow a restructuring of the debts.
While House Speaker Paul Ryan originally promised a solution for Puerto Rico's debt problem by May 1, the march of the legislation has been slowed by an inability to gain enough Republican support for its current form.
In the governor's speech Sunday, he said he would continue to try to reach a "consensual " solution with creditors. He said a federally approved mechanism to restructure the debt was necessary.
However, he said any federal "oversight board" must respect the Puerto Rican people's democratic control over their government.
"For Congress to act otherwise would be to reinstate colonial power over Puerto Rico," García Padilla said. "This will open a Pandora's Box with dangerous and unforeseen consequences."
On Monday the Puerto Rico Sales Tax Financing Corp. (COFINA) Senior Bondholders Ad Hoc Group released a statement. COFINA revenue bonds are backed by sales tax revenues.
"Without the legal framework and restructuring tools required to address this debt crisis, Puerto Rico's leaders will continue making decisions out of desperation," the statement said.
"Although the suspension of payments by the GDB does not impact COFINA's creditors, our group wants to reiterate its support for pragmatic legislation that helps overhaul the Commonwealth's obligations, reignite on-island growth and shield U.S. taxpayers from funding a bailout," said former U.S. Senator Judd Gregg, an advisor to group.
