Puerto Rico Defaults on Bond Payment

Puerto Rico defaulted on nearly $174 million of a $1 billion payment that was due on Monday, January 4, 2016, paying higher-ranking creditors at the expense of lower ranking ones. The island continues to struggle with almost $72 billion in debt.

Puerto Rican governor, Alejandro Garcia Padilla, ordered a “clawback” last week of cash that normally would have been used to pay certain bonds, and diverted the funds toward a $328 million payment to the island’s general obligation bondholders. Due to the “clawback,” other bonds were put into default.

In the case of bonds issued by the Puerto Rico Infrastructure Financing Authority (PRIFA) and the Public Finance Corporation, there are no more cash reserves, meaning the responsibility to make payments now falls to the bond insurers. Standard & Poor’s issued a statement that it was going to downgrade the PRIFA’s rating from CC to D, even deeper into junk bond territory.

According to S&P, the rating change was “not done lightly, as it opens up the commonwealth to litigation.” Further, it demonstrates the government’s unwillingness to default on general obligation debt, where bondholders hold a particularly strong legal claim and could send a message to bondholders during restructuring negotiations.

Opponents of the “clawback” have argued that it violated Puerto Rico law. In addition, as much as $94 million in federal excise tax from the sale of rum on the mainland was to be placed in a trust to pay principal and interest on bonds issued by PRIFA, which allegedly was not done.

S&P did not change its ratings on any other Puerto Rico bonds, and it remains to be seen if Congress will intervene to find ways to help the island.

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The attorneys at Dimond Kaplan & Rothstein, P.A. represent investors who have placed their money in Puerto Rico bonds. If you lost money on your investment, you may have certain legal rights that require your immediate attention. Contact us to schedule an appointment or consultation today.

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