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Published on 7/1/2016 in the Prospect News Distressed Debt Daily and Prospect News Municipals Daily.

Puerto Rico governor declares moratorium; 2016 fiscal situation ‘dire’

By Caroline Salls

Pittsburgh, July 1 – The Government Development Bank for Puerto Rico (GDB) and the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF) said the governor of Puerto Rico issued two executive orders that declare a moratorium on the payment of the commonwealth’s debt, implement cash and liquidity preservation measures and protect Puerto Rico from the exercise of creditor actions.

According to a debt service breakdown released Friday, $2,008,300,000 of debt service was due on July 1, comprised of $1,049,500,000 of principal and $958.5 million of interest. Of that total, $932.3 million was expected to be paid in full on July 1 and $192.1 million was expected to be partially paid. A total of $161.9 million was held by debt trustees for the partial payments.

“The fiscal situation of the commonwealth on the last day of fiscal year 2016 is dire,” the entities said in a news release.

The entities said Puerto Rico was expected to end June with roughly $200 million in cash in its treasury single account (TSA) and another $150 million in funds from public corporations in a clawback account, while facing about $1 billion of general obligation and commonwealth-guaranteed debt service obligations on July 1.

According to the release, those obligations would typically be paid out of the TSA. However, after accounting for reserves available to pay GO and commonwealth-guaranteed debt that was expected to be payable on July 1, Puerto Rico projected that these creditors would still be owed more than $800 million on July 1.

“Even if the commonwealth were to devote every last penny in the TSA and the clawback account to debt service on July 1, it would still owe holders of the public debt hundreds of millions of dollars,” the release said.

The entities said the Department of the Treasury’s cash flow projections for this fiscal year “paint a similarly challenging picture,” and the government will need to continue implementing extraordinary liquidity measures over the coming six months, including delaying payments to vendors and special contributions to retirement systems, extending internal financing from some of Puerto Rico’s instrumentalities and delaying capital expenditures in order to continue providing essential services to Puerto Rico’s citizens.

“After these extraordinary measures, based on current revenue and expense projections, the TSA will exhaust its liquidity balance in the next 30 to 60 days.

“Even after the implementation of the measures in the executive orders, the balance in the TSA is still projected to fall below approximately $95 million during the remainder of this year.

“This is a dangerously low cash position for a government that funds services to millions of Puerto Ricans.”

The executive orders declare Puerto Rico and several additional government entities to be in a state of emergency and extend the state of emergency that was previously declared for some other governmental entities, including the Puerto Rico Highways and Transportation Authority, the University of Puerto Rico and the Metropolitan Bus Authority, as well as financing entities such as the Puerto Rico Infrastructure Financing Authority.

In addition, the entities said the executive orders allow the commonwealth and the other issuers to suspend the transfer of specified funds to and from the entities to support the conservation of cash at the central government and, as a result, avoid a government shutdown

The executive orders implement a stay on creditor remedies, which the entities said is a “crucial element of enabling the commonwealth to seek a debt restructuring and right the island’s ship.” The orders also suspend Puerto Rico’s GO and guaranteed-debt obligations, along with the payment of obligations of other issuers, until Jan. 31, 2017.

“The measures enacted yesterday will not, however, take the place of either the real and significant debt relief that the commonwealth must achieve or the hard work that must be done by the government itself to rein in spending, boost revenues and re-ignite the island’s economy,” the release said.


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