Puerto Rico Begins Choosing Which Debt Payments to Make

By MARY WILLIAMS WALSHDEC.

Gov. Alejandro García Padilla, left, of Puerto Rico, with Pedro Pierluisi, the island’s nonvoting member of Congress, delivered a “distress call” at a Senate hearing on Tuesday. Credit Pablo Martinez Monsivais/Associated Press

Gov. Alejandro García Padilla, left, of Puerto Rico, with Pedro Pierluisi, the island’s nonvoting member of Congress, delivered a “distress call” at a Senate hearing on Tuesday. Credit Pablo Martinez Monsivais/Associated Press

WASHINGTON — Puerto Rico avoided its first major default by making payments of $354 million on its debt on Tuesday, but the island’s governor said that he had already taken steps to halt certain payments on other debt coming due on Jan. 1.

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“This is a distress call, from a ship of 3.5 million people that is adrift at sea,” said Gov. Alejandro García Padilla, referring to the population of the island.

He said the island had, in effect, been able to meet Tuesday’s deadline as a result of a trade-off. It made this month’s payments on a class of bonds that have constitutional guarantees by using money that otherwise would have been earmarked for next month’s payments on a lower tier of bonds. It is a move that will probably set off lawsuits from creditors if Puerto Rico makes good on the threat.

The announcement of the repayment, by the island’s Government Development Bank, came as Governor García Padilla and other officials were testifying before the Senate Judiciary Committee, which is considering whether Congress should give the island the right to seek relief in bankruptcy court. Current law specifically excludes Puerto Rico, because of its legal status as a United States territory.

The governor reiterated during the hearing that Puerto Rico had run completely out of cash. He said that as of Tuesday, he had ordered the island to “claw back” some of the revenue dedicated to paying some of its lower-ranked debts.

The governor did not specify which lower-ranking debts would go unpaid. But other experts at the hearing said the vulnerable bonds included Puerto Rico’s highway bonds; bonds sold for general infrastructure, which are backed by a rum tax; and bonds that financed a convention center. It was unclear on Tuesday which entities or individuals had purchased those bonds.

The bonds subject to the clawback have payments due to investors every six months, with the next payment due on Jan. 1. By putting the clawback mechanism into effect on Tuesday, the governor halted a process in which the island’s monthly prepayments are placed in a sort of “lockbox” to ensure that the next round of payments is made. That move could give bondholders the grounds to sue immediately, even though they would not see a loss on their investment until Jan. 1.

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