Bondholders Stunned As Puerto Rico Finds $4.4 Billion In Outstanding Debt “Unconstitutional”
If the Government, at any level, sells bonds they do not have the authority to sell, are the citizens liable? No. Neither is the government itself, but rather, the agents of the government who authorized the sale of the bonds, including the politicians who authorized it, as they all acted outside their constitutional authority. – Shorty Dawkins, Associate Editor
After Puerto Rico defaulted on its $422 million debt payment in May, governor Padilla begged congress to step in and help out, which happened shortly thereafter when a House committee cleared legislation that provided Puerto Rico with a way forward on restructuring its debt.
As it turns out, on the day the House announced that it planned on taking up the Puerto Rico bill next week, a 17 member audit commission found that two debt issues worth $4.4 billion of the $72 billion in debt outstanding were unconstitutional.
Said otherwise, the government may now just declare the bonds invalid. It’s a handy development for governor Padilla, since the two debt issues were expected to default on July 1. Also helpful is the fact that it would be one less item for Padilla to worry about since he proposed a budget for 2016-2017 that provides for only $209 million of the $1.4 billion in current debt service cost.
An audit report published on Thursday suggests that debt-laden Puerto Rico may be able to void some of its borrowing because politicians exceeded constitutional debt limits and their own authority.
The report, shared with MarketWatch, states that some of Puerto Rico’s debt may have been issued illegally, allowing the government to potentially declare the bonds invalid and courts to then decide that creditors’ claims are unenforceable. The scope of the audit report, issued by the island’s Public Credit Comprehensive Audit Commission, covers the two most recent full-faith-and-credit debt issues of the commonwealth: Puerto Rico’s 2014 $3.5 billion general-obligation bond offering and a $900 million issuance in 2015 of Tax Refund Anticipation Notes to a syndicate of banks led by J.P Morgan.
Money for those debt payments is not in the commonwealth’s proposed budget, either. On Tuesday Puerto Rico’s governor, Alejandro García Padilla, sent a proposed 2016-17 budget to the island’s legislature that provides for only $209 million of the $ 1.4 billion of current debt-service cost. As García Padilla told reporters at a news conference: “This is simple: either we pay Wall Street or we pay Puerto Ricans. If the legislature decides we pay Wall Street more, well, each has his responsibility. I will continue defending Puerto Ricans. Money I send to Wall Street, I do not have to provide services here.”
Puerto Rico defaulted May 1 on a portion of its $72 billion in outstanding debt, but the commission’s audit covers two debt issues expected to default on July 1. The report’s conclusions may allow the commonwealth to pursue a strategy with even more dire consequences for bondholders. The commission’s report says that Puerto Rico may have violated its constitution by borrowing to finance deficits, borrowing beyond its debt ceiling and using a refinancing technique called the “scoop and toss” to effectively exceed bond-duration limits.