With the governor of Puerto Rico refusing to pay interest on $370 million of $73 billion of debt by 5 p.m. on Monday, May 2, the U.S. territory will enter the third-largest default in history of the planet.
With its bonds trading at about 36 percent of face value in March, the Commonwealth of Puerto Rico offered a restructuring that would require the creditors to forgive $33 billion of its debt. But it is understood that an agreement was not reached with a group of hedge funds, including Monarch Alternative Capital, Whitebox Advisors, Davidson Kempner Capital Management and Stone Lion Capital Partners.
Governor Alejandro García Padilla supposedly threatened creditors in March that if they did not exchange all their debt for an average of 56 cents-on-the-dollar in so-called “Base Bonds,” Puerto Rico would ask Congress for the right to file for bankruptcy and potentially wipe out most of its debt.
Speaker of the House Paul Ryan, with the support of both parties’ leadership, asked Congress in mid-April to “bring order to the chaos” in Puerto Rico by passing legislation that would create a seven-member federal control board that could facilitate some court-ordered debt restructuring that could include some form of debt forgiveness.
But with the National Taxpayers Union warning that the Puerto Rico panel could serve as a dangerous precedent for “wayward debt-ridden state governments” on the mainland to try off-loading their debt, conservative House Republicans on the Natural Resources Committee revolted on April 14 in favor of bondholders over politicians by killing the vote “Puerto Rico Oversight, Management, and Economic Stability Act.”
Bloomberg reported that after officials with the Puerto Rico Government Development Bank gave up on a last-ditch effort to negotiate an agreement with creditors on April 30, the governor issued an executive order suspending interest and principal payments.
With Moody’s Investors Service analysts warning last week that any non-payment, even if agreed to by creditors, constitutes a default in their eyes, news of the governor’s action sent some Puerto Rico bonds crashing to as low as 20 percent of face value.
“The decision not to pay has been a very difficult one, and one that frankly I would rather not take. But faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice. I decided that essential services for the 3.5 million American citizens in Puerto Rico came first.”