Megan Davies and Jessica DiNapoli, Reuters, August 3, 2015
Puerto Rico has defaulted on debt by paying only a fraction of what was due Aug. 1, showing the depth of the island’s economic and cashflow problems and potentially opening the door to broader defaults and litigation from bondholders.
The U.S. commonwealth paid only $628,000 of a $58 million payment due on its Public Finance Corp (PFC) bonds, the head of its Government Development Bank said in a statement on Monday.
“Due to the lack of appropriated funds for this fiscal year, the entirety of the PFC payment was not made today,” GDB head Melba Acosta said.
Puerto Rico Governor Alejandro Garcia Padilla shocked investors in June when he said the island’s debt, totaling $72 billion, was unpayable and required restructuring. The non-payment marks the first default by the commonwealth and is the most notable since Detroit defaulted on $1.45 billion of insured pension bonds before filing for bankruptcy in 2013.
A default could open the door to a fight with investors. Daniel Hanson, analyst at Height Securities, said in a research note last week that market participants would probably file a lawsuit in San Juan as soon as Tuesday.
While Puerto Rico has argued that missing a payment would not constitute default because its legislature is not legally bound to appropriate the funds for payment, credit agencies and investors saw it differently.
“Moody’s views this event as a default,” said Moody’s analyst Emily Raimes in a statement. “This is a first in what we believe will be broad defaults on commonwealth debt.”
Standard & Poor’s said the missed payment presages other possible defaults as liquidity becomes further constrained, and added it would impede the island’s ability to obtain financing for cash flow needs. The credit agency lowered its rating on $1 billion of PFC debt following the default to “D” from “CC.”