Puerto Rico teeters on another default, governor to decide

Reuters News
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Posted: Nov 30, 2015 12:12 PM

SAN JUAN/NEW YORK (Reuters) - Puerto Rico Governor Alejandro Garcia Padilla said he will decide on Monday afternoon or Tuesday morning whether to make a bond payment due Dec. 1, in what could be another default from the indebted island that skipped part of a bond payment in August.

A further default from Puerto Rico, facing more than $70 billion in total debt, could trigger lawsuits, shake bond prices and would show the drastic action the government is taking to keep the island running.

Moody's credit agency has predicted that Puerto Rico will default on at least a portion of its scheduled debt on Dec. 1, which consists primarily of $355 million of debt service on notes issued by the U.S. territory's Government Development Bank (GDB).

"There are creditors of the Government Development Bank that continue to negotiate with the bank today," Garcia Padilla said at a news conference in San Juan on Monday, in reference to the Dec. 1 payment. "Depending on those negotiations, I would be making the decision today in the afternoon, and tomorrow morning.”

Garcia Padilla said that the government was analyzing the impact that making the payment would have on essential government services.

Puerto Rico in August defaulted for the first time, paying only $628,000 of a $58 million payment due on its Public Finance Corp bonds.

There are two parts of the GDB debt due on Tuesday - $81.4 million of non-general obligation-backed debt and $273.3 million of notes backed by the commonwealth's general obligation guarantee, according to Moody's.

In a recent note, the rating agency anticipated that a default on the guaranteed debt could trigger legal action on behalf of general obligation bond creditors.

Moody's said a default on either security would show that the commonwealth is "forced to miss debt service payments in favor of providing essential government services because of its increasingly weak liquidity position."

"There would be a new round of selling pressure if they default," said John Miller, co-head of fixed income for Nuveen Asset Management. He said that if Puerto Rico defaults on GDB debt that carries a commonwealth guarantee, the chance of it making a general obligation bond payment on Jan. 1 "would drop precipitously."

Puerto Rico also has a $331.6 million general obligation debt payment due on Jan. 1 and a $9.8 million payment of non-general obligation debt, according to a source familiar with the situation.

The minority leader in the Puerto Rico House of Representatives, Jenniffer Gonzalez-Colon, said it was a mistake for Puerto Rico to default in August as the "damage inflicted to Puerto Rico’s credibility in news headlines around the world, far exceeded (that) needed to satisfy that debt to the creditors."

Tuesday's GDB debt is a small piece of broad discussions between Puerto Rico and its creditors. The island has said it wants to create a universal exchange offer, or "superbond," whereby holders in several different credits could exchange debt for a single new bond.

(Reporting by a contributor in San Juan and Megan Davies in New York; Additional reporting by Nick Brown; Editing by Jeffrey Benkoe and Alan Crosby)