Puerto Rico will skip payments on some of its debt due on Monday, the island's second default this year, but will remain current on its most important debt, Gov. Alejandro García Padilla said Wednesday.
The Caribbean island will pay the roughly $330 million due in general obligation debt, default on which would have been seen as a more serious move because those bonds have the strongest legal protections of any of the island's obligations. But the decision still keeps alive the drama surrounding its deteriorating finances as investors wait for the next shoe to drop.
When asked about the shutdown of key government services, García Padilla told reporters at a press conference: "We have to do all we can to avoid that situation."
The commonwealth government will default on a $35.9 million payment due to its Infrastructure Finance Authority (PRIFA). It will also default on $1.4 million due to its Public Finance Corp., but will make payments to most other authorities. The island was facing a bill of about $1 billion had it made all payments.
The U.S. commonwealth, suffering from a near decade-long recession with a 45 percent poverty rate and a shrinking tax base due as thousands migrate to the mainland, first defaulted in August when it failed to make the full payment on its PFC bonds.
This announcement now opens the door to litigation from holders of defaulted bonds. García Padilla, at the press conference, says while some funds say he is in nonpayment, he argued that the island's constitution allows for this action to "protect Puerto Ricans." He once again railed against "vultures" seeking to profit from the island's debt woes, and accused them of influencing the U.S. Congress not to act to help Puerto Rico.
García Padilla has said the $70 billion in debt outstanding is not payable and requires restructuring. Puerto Rico has been negotiating with creditors to try and persuade them to take a reduction.
Puerto Rico's general obligation debt, carrying an 8 percent coupon and maturing in 2035, last traded on Tuesday with an average price of 71.726 cents on the dollar.
Island officials have given clear warnings of defaults. Melba Acosta, president of the Government Development Bank, was quoted in local media saying the island was expected to default on a Jan. 1 payment on its PRIFA bonds.
A creditor-side source told Reuters Tuesday that some creditors were preparing possible lawsuits in the event of default, but it was unclear how quickly they could be filed.
Maintaining the general obligation payment avoids the messy possibility of defaulting on debt backed by constitutional guarantees and considered the class with the strongest legal protection for investors. The next test on GO debt is not until July, when the government faces a $1.9 billion payment.
García Padilla on Dec. 1 granted the U.S. territory power to take revenues from public agencies such as the highways agency HTA, PRIFA and convention center authority in order to pay GO debt and maintain essential services.