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Puerto Rico faces severe debt crisis

Puerto Rico is facing a severe repayments crisis. The territory has already defaulted on a large repayment due at the beginning of this month, albeit achieving slight damage limitation. A larger repayment looms in July, and it’s looking likely even holders of general obligation bonds are at risk of losing out on returns.

May 3, 2016 // 5:30PM

Puerto Rico’s Government Development Bank (GDB) missed a US$400mn repayment obligation to the territory’s debtors on May 1st. Although not the first, the payment default is the largest in the island’s history.

The bond was issued in 2011 with a 4.7% yield. It last traded at 38 cents to the dollar in March this year.

The GDB, the territory’s main issuer of bonds, will still pay the interest on the defaulted debt, which amounts to US$22mn.

Furthermore, the GDB has already reached a deal with some creditors over repayments of US$33mn of the total due at the beginning of May, with the creditors swapping their debt for notes maturing at a later date.

As a result, the bank is expected to be able to pay some of the total owed, but will still likely default on around US$367mn of the principal amount.

Puerto Rico also faces a US$1.9bn repayment in July. US$805mn of these bonds are general obligation bonds, meaning their repayment should technically be guaranteed by the island’s constitution.

“The general obligation bonds mean nothing in the current context,” said a senior fixed income investor speaking to Bonds & Loans.

The investor added that the territory will almost certainly default on its debt repayment obligations in July.

The island currently owes around US$72bn, which according to the GDB, will be unserviceable. This means the territory would face the largest municipal debt default in history if it defaults on its total obligations.

The territory has been in discussion with bondholders over plans to allow it to pay 50 cents on the dollar, effectively halving its debts. It has managed to achieve a tentative deal with holders of US$900mn worth of its debt, offering a 53% haircut on the bonds, and paying creditors 47 cents to the dollar on their holdings.  

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