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.
Gov. Alejandro Garcia Padilla invoked a debt moratorium law approved last month, saying during a televised address Sunday 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 bank said in a statement. 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,” Mr. 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.”
The GDB bond in question, which matured May 1, is a $400 million taxable security issued in 2011 with a 4.7% interest rate. It last traded in March at about 32 cents on the dollar.
Those with the largest positions, according to the latest disclosure filings compiled by Bloomberg: Thompson Investment Management, $24 million; Frost Investment Advisors, $11.2 million; Baird Financial Group, $5.1 million; Texas Mutual Insurance Co., $2 million; Merchants Mutual Group, $1.5 million; and UBS Asset Managers of Puerto Rico, $1 million.
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.