Loading ...Two days before a potential historical default, Puerto Rico Governor Alejandro Garcia Padilla made it clear that the commonwealth won’t pay bondholders even as Congress votes on a bill allowing the island to restructure its $70 billion in debt.
“On July 1, 2016, Puerto Rico will default on more than $1 billion in general obligation bonds, the island’s senior credits protected by a constitutional lien on revenues,” Garcia Padilla wrote in a editorial posted on a CNBC website.
The lapse will mark the first time the U.S. territory has failed to pay what it owes on general-obligation debt, a $13 billion swath that its constitution says has the top claim to the government’s funds. Garcia Padilla previously said the commonwealth couldn’t raise enough to cover what’s owed to bondholders even if he shut down the government. The island has about $2 billion in principal and interest payments due Friday.
“All the efforts up until now have already damaged relations with investors,” said Daniel Solender, who oversees $19 billion, including Puerto Rico securities, as head of municipals at Lord Abbett & Co. in Jersey City, New Jersey. “By taking a step to break the constitution, it makes it more definitive.”
The default signals the depths of the crisis on the island, which had been tapping whatever funds it could to avoid missing payments on securities backed by the strongest legal pledge. The escalating strain prompted Congress to create a bill that would give Puerto Rico the ability to cut its debt and put a hold on bondholder lawsuits that could jeopardized its ability to pay for schools, police officers and health care. The Senate voted 68-32 Wednesday morning on the measure, setting up a final-passage vote as soon as this evening.