Puerto Rico said one of its agencies failed to transfer funds to a trustee to cover an Aug. 1 debt payment because the legislature didn’t appropriate the funds when it passed the budget last month.
It’s unclear whether the Public Finance Corp. will make the $36.3 million payment on bonds maturing that day. If it doesn’t, that would mark the first time Puerto Rico has defaulted on a debt payment and would come as the commonwealth seeks to negotiate with creditors to restructure $72 billion of obligations.
“In accordance with the terms of these bonds, the transfer was not made due to the non-appropriation of funds,” Melba Acosta, president of the commonwealth’s Government Development Bank, said in an e-mailed statement.
The trustee, U.S. Bank, declined to comment, Pat Swanson, a spokesman for the bank, said in an e-mail.
Last month, lawmakers included about $300 million in the current budget to repay GDB debt. The bank may be able to use the money to pay bondholders next month, though it would need legislative approval to do so. The legislature is out of session until mid-August.
Debt of the Public Finance Corp., which has borrowed to help pay the government’s bills, traded July 1 at an average 68 cents on the dollar, a record low, according to data compiled by Bloomberg.
“While the payment is not large and is primarily due to on-island creditors, the payment is likely to be the first skipped coupon by a GDB-backed entity,” Daniel Hanson, an analyst at Height Securities, a Washington-based broker dealer, wrote in a July 13 report.
Puerto Rico is in need of cash because investors have effectively closed the island’s access to the capital markets by demanding high interest rates. The development bank, a source of available cash for the commonwealth, had $778 million of net liquidity as of May 31, down from $2 billion in October. To avoid running out of cash by Sept. 30, the bank wants to exchange its notes for longer-maturity debt.
Another $140 million of development bank bonds mature Aug. 1, Bloomberg data show. The GDB said last week it may purchase its notes “from time to time” with cash, new securities or a combination. Such purchases are expected to be at prices “that are materially less than par,” according to a filing through the Municipal Securities Rulemaking Board.
Governor Alejandro Garcia Padilla last month directed island officials to create a debt-restructuring plan by Aug. 30. The governor says Puerto Rico cannot afford to repay what it owes.
The island’s financial crisis has drawn attention in Washington. Key Democrats including U.S. Senator Chuck Schumer, who represents New York, are backing legislation that would allow Puerto Rico’s public corporations to file for Chapter 9 bankruptcy protection, just as U.S. cities can. A bill to do so has stalled for lack of Republican support.
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