Eight days after it defaulted on bond payments for the first time, the government of Puerto Rico said on Tuesday that it planned to issue $750 million more in bonds for an array of construction and maintenance projects.
The announcement comes less than a month before a high-level working group is scheduled to reveal plans for broad restructuring of the island’s debt.
The new borrowing would be carried out by Puerto Rico’s Aqueduct and Sewer Authority, a government enterprise widely known by its Spanish acronym, Prasa. The $750 million would be used for projects over four years, and to pay back certain bills Prasa has owed since 2013.
The new bonds would be revenue bonds, to be repaid by the fees that residents and businesses pay for water and sewer services. A prospectus showed that the bonds had not yet been rated.
The bonds that defaulted on Aug. 3 were issued by the Public Finance Corporation, a single-purpose entity that refinances other government debts. Puerto Rico has taken the position that those debts consisted of “moral obligation bonds,” repayable solely through annual appropriations by the legislature.
When the legislature failed to appropriate the money this year, there was no legal obligation to make the bond payments, according to the president of Puerto Rico’s Government Development Bank, Melba Acosta Febo.
Issuing new debt while planning to restructure pre-existing debt, and even letting certain bonds default, “reflects the individual financial circumstances of the various debt issuers across the commonwealth,” Ms. Acosta said in a statement on Tuesday.
Based on projections, she added, “the G.D.B. currently does not contemplate Prasa necessitating a restructuring of its debt.”
Kent Collier, chief executive of Reorg Research, a firm that monitors Puerto Rico on behalf of hedge funds and other clients, called the authority “one of the better performing public corporations” on the island. It has a monopoly on essential services, which, credit analysts generally agree, makes its bonds less risky than those sold for nonessential projects, like stadiums. Prasa runs dams, treatment plants, pumping stations and more than 20,000 miles of water and wastewater pipelines islandwide. A recent engineer’s report called the authority “a critical entity for the well-being of Puerto Rico.”
So far, little is known about Puerto Rico’s debt restructuring proposal. Analysts have been waiting for the details to be made public at the end of this month, particularly which types of debt the government wants to restructure, and how large the losses for investors would be. The value of Puerto Rico bonds has been in sharp decline, particularly since early 2014, when the major ratings firms lowered its general-obligation bonds to junk status.
Puerto Rico has a total bonded debt of about $72 billion, which its governor, Alejandro García Padilla, has said it cannot repay without restructuring the debt — even pausing some payments — and restoring economic growth. The debt is complex, involving many types of bonds, some more secure than others. Some of the more unusual features of certain bonds have not yet been tested in court, and it is far from clear which debts will ultimately come through the restructuring with the least impairment.
Mr. Collier said he was expecting a substantial amount of litigation over the restructuring. Puerto Rico’s constitution explicitly gives general-obligation bonds first priority over all other expenditures. Opposition lawmakers tried this year to have that provision removed, but they were unsuccessful.
Aside from its bonded debt, Puerto Rico owes at least $40 billion of unfunded retirement benefits to its public workers, making them creditors as well.
Ms. Acosta said Prasa had already based its projections on future rate increases, “which would be required unless a recurrent source of revenue becomes available that will meet certain revenue coverage.”
Rate increases might be politically difficult, however. Puerto Ricans already pay unusually high fees for their electricity. Taxes have risen and water is already being rationed because of a severe drought on the island.
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