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 There had been speculation Puerto Rico would default on all or
part of the $355 million notes issued by its financing arm, the
Government Development Bank. The U.S. territory said in a statement
that it made the Dec. 1 bond payment despite "extreme fiscal
challenges."
While Puerto Rico first defaulted in August, failure to make the
payment on Tuesday would have been more significant because part of
that debt was protected by the commonwealth's constitution.
Another default could have triggered lawsuits, further spooked
investors and undermined the island's efforts to climb out of $72
billion in debt and forced it to take drastic measures to keep
public services running.
Puerto Rico is under pressure to meet payments on government
services. For example, it pays Christmas bonuses to public
employees, yet officials have said in the past month that it is
unclear when and if the government will meet that payment, given the
cashflow situation.
Moody's said the ratings agency would "continue to view default as
likely on future commonwealth debt payments."
 Puerto Rico's next deadline is $945 million in total bond payments
on Jan. 1, including $363 million in general obligation debt
service, Moody's said.
A Puerto Rico executive order signed on Monday by Governor Alejandro
Garcia Padilla said it gives the commonwealth the ability to claw
back revenues from certain government agencies, including the
highway authority HTA and the infrastructure authority PRIFA.
Garcia Padilla told a U.S. Senate Judiciary Committee that Puerto
Rico would have to "claw back revenues pledged to certain bonds
issued in order to maintain public services" and to repay bonds
issued with the full faith and credit of the commonwealth.
An imminent default "looms large," Garcia Padilla said.
"In simple terms, we have begun to default on our debt in an effort
to attempt to repay bonds issued with the full faith and credit of
the commonwealth and secure sufficient resources to protect the
life, health, safety and welfare of the people of Puerto Rico," the
governor said in written testimony.
Justice Secretary Cesar Miranda said that the clawbacks "could be
interpreted as a technical default, in the way that we retain money
destined to eventually pay a debt when due" and said it could open
the door to litigation.
Puerto Rico's 8 percent General Obligation Bond rallied to trade at
an average price of 74.9 cents on the dollar, with a yield dropping
to 11.2 percent versus a yield of 11.8 percent on Monday, on news
that it did not default on the GDB debt.
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With 45 percent of its 3.5 million population in poverty, Puerto
Rico is a meteorological paradise mired in economic purgatory. Years
of over-spending and the expiration of corporate tax incentives
stuck it with debt that gets harder to pay as residents increasingly
emigrate to the United States.
"Puerto Rico's debt crisis didn't happen overnight, it's been years
in the making," said Senator Chuck Grassley, who chaired the
committee at Tuesday's hearing. "The starting point is to identify
the problem."
Puerto Rico is in the process of trying to negotiate a debt
restructuring with investors which could involve a so-called
superbond that provides just one credit for various existing bonds.
One source familiar with the situation said negotiations had been
going slowly and will now probably drag into next summer as the GDB
payment buys some time.
"This just really buys a bit more time for the Commonwealth, but the
Puerto Rico leadership better act fast with respect to bond holder
negotiations if they want these payments to have been worthwhile,"
said David Tawil, president at hedge fund Maglan Capital.
Of the $355 million paid on Tuesday, $81.4 million was to service
non-general obligation-backed debt and $273.3 million was for notes
backed by the commonwealth's general obligation guarantee.
The payment on bonds issued by the GDB was crucial as Puerto Rico
tries to stretch its liquidity into 2016 to provide more time to
restructure debt.
In August, Puerto Rico paid only $628,000 of a $58 million payment
due on its Public Finance Corp bonds.
(Reporting by Megan Davies and Nick Brown; additional reporting by
Daniel Bases and Edward Krudy in New York and a contributor in San
Juan; Editing by Lisa Von Ahn, Grant McCool and Bernard Orr)
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