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Bankrupt Puerto Rico Commits Highway Robbery

Saturday December 5th, 2015   •   Posted by Craig Eyermann at 6:03am PST   •  

US-bankruptcy-court-puerto-rico-seal On Tuesday, December 1, 2015, the government of the fiscally-troubled U.S. terrritory of Puerto Rico was set to reach the end of its long road to defaulting on its debt, having run out of both money and time. Here’s how ZeroHedge described Puerto Rico’s predicament:

Puerto Rico has a problem. The commonwealth needs to make a $354 million bond payment on Tuesday and the government is basically out of money.

We previewed this rather precarious situation twice in the last two weeks (see here and here), noting that this time is indeed “different.” Why? Because unlike August when the island paid only $628,000 of a $58 million payment (so, just about 1%), a large portion of what’s due Tuesday is GO debt guaranteed by the National Public Finance Guarantee Corp. A default on that spells litigation.

A default “would likely trigger legal action from creditors, commencing a potentially drawn-out process absent swift federal intervention,” Moody’s warned last month.

The U.S. territory’s government had been trying to force its creditors into accepting permanently lower payments in addition to a restructuring of the terms by which it would pay back the millions it has borrowed, but proved unsuccessful. The pension and hedge funds that had been enticed by the high yields that Puerto Rico’s government had offered to them in return for their loaning the territory money were proving unwilling to have the large losses that the territory’s elected leaders were demanding imposed upon them without going to court.

At least, that’s where the territorial government of the Commonwealth of Puerto Rico and its creditors were headed when Puerto Rico’s elected leaders, fearing that they wouldn’t be able to succeed in legal proceedings, became so desparate to avoid having their fate decided impartially in court after defaulting on their debt that they robbed the territory’s dedicated funds for paying highway and convention center bond debts to instead make their scheduled $354 million debt payment. Bloomberg reports:

Puerto Rico said it made all principal and interest payments due Tuesday, averting a default on directly guaranteed bonds and allowing the commonwealth to continue talks with creditors to reduce its $70 billion debt burden.

Governor Alejandro Garcia Padilla signed an executive order to permit the redirection of revenue budgeted for highway and convention center bonds and other agencies to pay for debt issued or guaranteed by the commonwealth, according to a Government Development Bank statement. The GDB, which lends to the commonwealth and its agencies, had $354 million in principal and interest payments due Tuesday.

Garcia Padilla announced the so-called claw-back provision during a Senate hearing Tuesday, where he received little support for his request to access bankruptcy to help right the commonwealth’s finances. The governor said the island is running out of cash and will focus on providing essential services while in negotiations with creditors to accept losses on their holdings. It faces another big bond payment at the start of January.

In addition to stiffing the creditors who loaned the territory money to support its highway and transportation bonds, Puerto Rico’s elected leaders have also been delaying tax rebates owed to individuals and businesses, holding up payments to suppliers for their services rendered and are also playing a shell game with the government accounts that they control to come up with the money needed to avoid defaulting on their General Obligation bonds.

Beyond that, their ability to turn to Washington D.C. to be bailed out is being limited by their not coming clean on the condition of Puerto Rico’s government’s finances. Bloomberg reports that the territory’s government has yet to file any audited financial statements for 2014.

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December 2015