Puerto Rico set to default on Govt Development Bank debt

Bloomberg

Puerto Rico will default on a $422 million bond payment for its Government Development Bank, escalating what is turning into the biggest crisis ever in the $3.7 trillion market that U.S. state and local entities use to access financing.
Governor Alejandro Garcia Padilla invoked a debt moratorium law approved last month, saying during a televised address that the commonwealth needs to focus on providing essential services.
The bank, already operating under an emergency period, had until the end of Monday to make the payment. The Government Development Bank reached a tentative framework agreement with investors who hold $900 million of its debt late Sunday under which creditors would accept a potential haircut, leaving them 47 cents on the dollar of the face value of their original securities.
The parties agreed to keep discussions out of court while they negotiate.
“Faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice,” Garcia Padilla said during his 10-minute speech. “I decided that essential services for the 3.5 million American citizens in Puerto Rico came first.”
GDB’s missed payment may open the door to larger and more consequential defaults on general-obligation bonds, which are protected by the island’s constitution.
Puerto Rico and its agencies owe $2 billion on July 1, including $805 million for general obligations. It also could imperil slow-moving efforts by U.S. lawmakers to resolve the biggest crisis ever in the tax-exempt, municipal bond market.
Puerto Rico officials have been negotiating with creditors to defer payments. No matter which route Puerto Rico took, credit-rating companies saw a default as
inevitable.
Moody’s Investors Service analysts said last week that any non-payment, even if creditors agree to it, constitutes a default in their eyes. S&P Global Ratings said a distressed debt exchange or temporarily withholding interest is synonymous to default.
The tentative accord with investors holding $900 million of debt involves bondholders swapping their securities in the near term at a 56.25 percent recovery rate, the bank said in a statement. If Puerto Rico at a later date reduces most of its debts through a broader restructuring, then the final recovery rate on GDB bonds would be 47 percent of the original value.
The non-payment by the GDB alone will push the amount of outstanding munis in default up by 44 percent, to $23.6 billion from $16.4 billion.