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 The missed payment will mark the first default by the commonwealth
and shows the depth of the island's economic and cashflow problems.
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.
According to a 2014 bond offering statement, Puerto Rico has never
defaulted on the payment of principal or interest of debt.
"Tomorrow is Aug. 1 and we don't have the money," Victor Suarez,
chief of staff for Puerto Rico's governor, told journalists in San
Juan, referring to a $58 million payment due on Public Finance
Corporation (PFC) bonds.
"The PFC payment will not be made this weekend," Suarez said. "It
was not consigned."
The island faces a number of debt payments due Aug. 1 but had
signaled in recent weeks that it may miss the PFC payment.
 The non-payment would be the most notable since Detroit, which had
about $8 billion of bonds, defaulted on $1.45 billion of insured
pension bonds before it filed for bankruptcy in 2013.
"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?'"
PFC bonds have weaker protections than many other Puerto Rico bonds
and the skipped payment had been signaled to investors over the past
few weeks. Suarez said on Monday that the commonwealth did not have
the current cash flow to pay the PFC bonds.
"I bought my (PFC) bonds with the anticipation of them defaulting,"
said Ben Eiler, managing partner at First Southern Securities in
Puerto Rico, earlier this week. "They're going to restructure in
some form or fashion, and I believe that restructure is going to be
higher than that level."
However, Puerto Rico is making another debt payment due. The head of
its Government Development Bank (GDB), President Melba Acosta, said
in a statement released Friday that the bank would make a $169
million payment for the debt service on GDB debt.
"From the perspective of Puerto Rico, it makes the most sense to
default on the PFC bonds," said Michael Comes, portfolio manager and
vice president of research at Cumberland Advisors in Florida.
"There's no recourse back to them if they don’t make the payments."
The looming default also indicates how cash-strapped the government
is. Suarez said the government only had enough cash to operate until
November if no additional measures are taken to increase cashflow.
The likelihood of a restructuring is leading investors to wonder how
Puerto Rico will prioritize debt payments versus citizens' needs.
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"We're beginning to discern a ... mindset on the island that the
government is weighing the interest of investors against the
economic interest of the island," said Thomas McLoughlin, UBS chief
investment officer wealth management research, on Thursday.
DEFAULT DEBATE
Suarez told reporters in San Juan on Wednesday that a missed payment
would not constitute default. Bond documents state that Puerto
Rico's legislature is not legally bound to appropriate the funds for
payment.
However, credit rating agency Standard & Poor's said earlier this
week it would view non-payment of rated PFC bonds on their due date
as a default. Moody's said it would also consider it a default.
"It (would be) the first failure by the government to pay on a debt
to public investors and indicates the weakness of the government's
ability and willingness to pay," said Timothy Blake, managing
director of Moody's Public Finance Group.
A default could open the door to a fight with investors. Daniel
Hanson, analyst at Height Securities, said in a research note that
market participants would probably file suit in San Juan as soon as
Tuesday.
Still, that could be an uphill battle.
"Our reading of the legal documents is that bondholders have very
limited remedies," said David Hitchcock, an analyst at S&P. "Puerto
Rico could potentially just ignore the bondholders."
Puerto Rico Justice Secretary Cesar Miranda said they had been
anticipating "any type of litigation that this situation may cause".
"We have been organizing ourselves, using internal resources when we
can, and external ones when necessary, to defend against any claim
that is made," Miranda said.
(Reporting by a contributor in San Juan; and Megan Davies and
Jessica DiNapoli in New York; Additional reporting by Karen Pierog
in Chicago; Editing by Clive McKeef, Dan Grebler and Ken Wills)
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