Puerto Rico to default on part of $1 billion in muni debt

Commonwealth declares it is unable to pay interest on certain municipal bonds whose payments are due January 4, 2016.

The coast at Patillas, Commonwealth of Puerto Rico. (Via Wikipedia entry on Puerto Rico)

WASHINGTON, December 30, 2015 – Officials speaking for the U.S. Commonwealth of Puerto Rico have just announced what many municipal bond investors have been fearing. The island’s government will default on two of 13 interest payments due to bondholders next Monday, January 4, 2016.

Agencies involved in the default include the Puerto Rico Infrastructure Financing Authority and the Puerto Rico Public Finance Corporation. Interest on remaining bonds with interest due on January 4 will be paid, with funds “clawed back” from revenues generated by three other agencies.

Thus far, the announcement has not had a major depressive effect on U.S.-based municipal bond prices, but that could change if these defaults become part of a larger cascade.

However, today’s announcement is putting major pressure on Ambac Financial Group, Inc. (symbol: AMBC), whose municipal bond insurance covers many current Puerto Rican GO and agency bonds. AMBC is off 3.14% this afternoon and is off over 40% year to date, largely due to fears over its Puerto Rican bond obligations.

Like other municipal and corporate bond and mortgage insurers, Ambac’s predecessor company was already forced to declare bankruptcy during the Great Recession, largely as a result of insuring iffy real estate debt instruments involved in the nationwide foreclosure disaster. It is unclear where the company currently stands financially in the current impasse over Puerto Rico’s municipal debt.

Clearly, addressing this situation will be a primary concern for Congress when it returns from its Christmas recess.

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