A financing unit of the Puerto Rican government failed to make a $93.7 million debt-service payment on Wednesday, underscoring recent warnings by Gov. Alejandro García Padilla that the commonwealth, which is seeking a “negotiated moratorium” on its $72 billion of debt, is fast running out of cash.
The unit, the Public Finance Corporation, was created to help with the central government’s chronic budget deficits. It has a little more than $1 billion in outstanding bonds.
The corporation’s bonds are backed by a promise that the Puerto Rican legislature will appropriate the cash needed to pay them down. But officials said that for this fiscal year, which began July 1, lawmakers did not appropriate the funds.
“In accordance with the terms of these bonds, the transfer was not made due to the non-appropriation of funds,” said Melba Acosta Febo, head of the Government Development Bank.
Bonds backed by legislative appropriations are generally considered a weaker credit than general-obligation bonds, and defaulting on such debt is arguably less of a provocation. General-obligation debt is secured by the “good faith and credit” of the central government, and in Puerto Rico it is also backed by an unusual constitutional promise to pay such bonds before any other expenditures. So far Puerto Rico has been making its scheduled payments on its $13 billion of general-obligation bonds.
But Puerto Rico has other payments coming due soon, including $276 million by the end of September to a fund that collects cash to distribute to the general-obligation bondholders. And on Aug. 1, another arm of the government, the Government Development Bank, is scheduled to repay $140 million of principal.
Over the past year much of Puerto Rico’s general-obligation debt was acquired at deeply discounted prices by hedge funds, which stand to make a profit if other types of debt go unpaid, leaving more cash to pay the general-obligation bonds.
Bills have been introduced in both houses of Congress allowing Puerto Rico’s public enterprises access to the bankruptcy courts under Chapter 9; if that were enacted, Puerto Rico might be able to impair its revenue debts. But so far the bills have not won the support of congressional Republicans.
In June, Mr. García Padilla said in an interview with The New York Times that Puerto Rico was in “a death spiral” and he had no choice but to seek relief.
That raised questions about a $416 million revenue-bond payment coming due on July 1, from a large government power authority known as Prepa.
Mr. García Padilla had expressed concern about parting with so much money just before hurricane season, when Prepa was likely to need to marshal its resources for repairs.
But market sources said that at the last minute, monoline insurers that had guaranteed Prepa’s bonds provided enough cash to avoid a default. For them, a default would have triggered costly insurance claims.
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