Puerto Rico’s expected default on debt due Saturday would be the start to what could end up becoming one of the largest municipal restructurings, with the potential to open the door to a fight with investors and spark volatility in bond prices.
Puerto Rico Governor Alejandro Garcia Padilla shocked investors in June when he said the island’s debt – totaling $72 billion – was unpayable and required restructuring.
Puerto Rico has flagged that it will likely skip a $58 million payment due Aug. 1 on its Public Finance Corporation (PFC) debt, which has weaker investor protection than some other bonds.
“What could surprise investors is when they actually hear the word default, and that a default occurred,” said Lyle Fitterer, head of tax-exempt fixed income at Wells Capital Management, which holds mostly insured Puerto Rico debt.
“The immediate reaction might be a slight sell-off in the marketplace because I think people will start to anticipate, OK, what’s the next series of debt they’re going to default on?”
It would mark the first missed debt payment. According to a 2014 bond offering statement, Puerto Rico has never defaulted on the payment of principal or interest of debt.