Puerto Rico bond default deadline is Saturday

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Puerto Rico's next move

As yet another key debt payment date closes in on Puerto Rico, here's a primer on what you should know, and who it will affect the most ahead of the deadline.

Q: If the Puerto Rico Public Finance Corporation (PFC) doesn't pay bondholders on Aug. 1, will it be considered a default?

A: Yes. According to Moody's vice president and senior credit officer, Ted Hampton, if there is no payment made on Friday, it will be the first default of a U.S. state, or state-like entity, since Arkansas couldn't make its bond payments during the Great Depression in 1933.

Q: What should Puerto Rico's bondholders do?

A: The outlook for Puerto Rico bondholders is rather bleak, said Nick Venditti, a portfolio manager at Thornburg Investment Management.

"If you're an investor in a heavily overweighted Puerto Rico municipal bond mutual fund, or have direct exposure to Puerto Rico's debt, your best-case scenario is to sell right now," Venditti said. "You won't be able to get a better dollar value return on your Puerto Rico investment than what it's trading at right now."

Q: How much money is due on Friday?

A: Puerto Rico's Public Finance Corporation, a subsidiary of the U.S. territory's Government Development Bank, owes bondholders $58 million. Puerto Rico will likely default on this payment due to PFC's failure to transfer $93.7 million on July 15 to the bond trustee.

The nonappropriation of the $93.7 million caused Standard & Poor's to lower its rating on PFC's bonds, saying it sees "default for this debt … as a virtual certainty." The rating agency also placed all other Puerto Rico tax-backed debt on its CreditWatch with negative implications.

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On Monday, Victor Suarez, chief of staff to Gov. Alejandro Garcia Padilla, reiterated that the commonwealth didn't have the cash flow to pay the principal and interest on the PFC bonds.

Some other payments are also due on Friday, including $140 million owed by the Government Development Bank.