MBI MBIA Inc

By Heather Gillers and Nick Timiraos 

The Puerto Rican government failed to pay almost half of $2 billion in bond payments due Friday, marking the commonwealth's first-ever default on its constitutionally guaranteed debt.

Gov. Alejandro García Padilla defended the historic decision by highlighting the island's tense relationship with Wall Street firms that own its debt.

Some of these firms stand to lose money as a result of Friday's nonpayment. Major insurers backing Puerto Rico's debt could also be forced to pay out as much as hundreds of millions of dollars to bondholders.

Puerto Rico had become over many years "a colony of Wall Street," Mr. García Padilla told reporters in San Juan on Friday. "We are starting the process of putting it back in the hands of Puerto Ricans."

President Barack Obama signed legislation Thursday that addressed the island's debt crisis but didn't provide any mechanism to avoid Friday's default. Instead, the law gives the island a stay against creditor litigation.

Of the $779 million in general obligation debt the commonwealth failed to pay Friday, about half could translate into missed payments for bondholders. The three major bond insurers active in Puerto Rico are expected to cover as much as $358 million.

Puerto Rico's Government Development Bank also skipped payments on some other bonds with weaker guarantees.

One creditor affected by Friday's actions is Eaton Vance Management, which holds a few million dollars in general obligation debt. But "for us it's a non-event," said Craig Brandon, Eaton Vance's co-director of municipal investments, because the firm expects to receive full principal and interest payments from insurers.

Much of Puerto Rico's debt is held by hedge funds and municipal bond mutual funds such as Oppenheimer Funds Inc. Oppenheimer's total Puerto Rico debt has a face value of $7 billion, including nearly $6 billion of uninsured bonds.

An Oppenheimer spokeswoman declined to comment on possible losses, saying the firm looks forward "to working with all stakeholders to help get Puerto Rico on a long-term sustainable path while protecting the interests of our shareholders."

The municipal bond fund with the second-largest amount of Puerto Rico debt is Franklin Templeton Inc., which holds $2.7 billion in face value, most of it uninsured. A spokeswoman declined to comment.

Municipal bond defaults are rare. The last time a state-level issuer defaulted on general obligation debt was when Arkansas did so in 1933.

The default was widely anticipated, and bond prices on Puerto Rico debt remained largely unchanged Friday, with benchmark uninsured general obligation bonds trading at 67.5 cents on the dollar. In contrast, many insured general obligation bonds continued to trade around 100 cents on the dollar.

News of the default was tempered by the passage of the restructuring legislation. The law authorizes the creation of a federally appointed fiscal control board in Puerto Rico, which establishes a framework for a more orderly debt workout. The board is tasked with restoring economic growth to the island and will have considerable power to approve debt restructuring.

The restructuring legislation prevents creditors from asking a court to force bond payments to be made ahead of essential services. Without such a safeguard, the island's debt crisis would have grown "much worse and might have been unsolvable," said Treasury Secretary Jacob Lew on Wednesday.

Congress spent months working on the bipartisan bill that was propelled through the Senate by concerns of a looming legal battle. Voluntary talks with general obligation bondholders broke down in recent weeks, and a group of hedge funds sued the island last week over a local debt-moratorium law, saying the island was legally required to pay them ahead of essential public services.

A separate group of hedge funds filed a motion Friday in a lawsuit against Puerto Rico's governor, asking to be exempted from the stay on lawsuits contained in the federal restructuring legislation. The motion said the funds hold more than $750 million in Government Development Bank debt, which Puerto Rico defaulted on in May.

Three large bond insurers are bracing for payouts as a result of Friday's events. National Public Finance Guarantee Corp. backs $173 million in general obligation debt that Puerto Rico was supposed to pay Friday, the company has disclosed.

Assured Guaranty Ltd. has reported that it backs $184 million in general obligation bond payments coming due in the third quarter of 2016, much of which was due Friday.

Ambac Financial Group backs only about $1 million in general obligation debt due Friday, but Chief Executive Officer Nader Tavakoli said in a televised appearance Friday that the bond insurer expected to pay between $45 million and $50 million in claims. Much of it will likely cover payments on the island's Infrastructure Financing Authority debt, which Puerto Rico also didn't make.

Mr. Tavakoli said in the interview that he hopes the fiscal control board created under the restructuring legislation will include "the right kinds of business people, growth-oriented business people," who will focus on fiscal and structural reforms for Puerto Rico, rather than on cutting payments to bondholders.

Assured Guaranty said in a statement that it is well prepared to handle defaults in Puerto Rico. "Our liquidity and capital position are very strong," the statement said. National Public Finance Guarantee, a unit of MBIA, declined to comment.

The island has been in a recession for most of the past decade and has seen a large drop in its population as residents, who are U.S. citizens, leave for the mainland.

Write to Heather Gillers at heather.gillers@wsj.com and Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

July 01, 2016 18:57 ET (22:57 GMT)

MBIA (NYSE:MBI)
Historical Stock Chart
From Mar 2024 to Apr 2024

MBIA (NYSE:MBI)
Historical Stock Chart
From Apr 2023 to Apr 2024