Puerto Rico default nears as debt deadline looms

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Fear that Puerto Rico will default on some of its bonds builds as a major debt service deadline edges closer.

Money managers, value investors, and analysts are all eyeing Dec. 1, when $355 million of notes issued by the Government Development Bank come due, as a litmus test of sorts, to see if the island is willing to make difficult decisions to avoid default on some of its most senior and constitutionally protected bonds.

The GDB, which is Puerto Rico's financing arm, recently released an update on its finance that showed the bank's net liquidity was approximately $875 million as of Sept. 30. The statement also disclosed that the bank's cash resources "may be depleted before the end of the calendar year 2015 in the absence of market access, other financing alternatives (including agreements with GDB's creditors) or emergency liquidity measures."

Moody's Investors Service believes that Puerto Rico will likely default on at least a portion of its debt obligations in the coming weeks, which would be the second default by Puerto Rico to date.

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"The GDB has less incentive to make a payment of $81.4 million om debt service on non-general obligation-backed debt, as the payment pledge does not benefit from constitutional protections," Moody's said in a note issued last week. "However, given the already severe and growing liquidity challenges facing the commonwealth, it may be forced to default also on the $273.3 million of GDB notes that are backed by the commonwealth's general obligation (GO) guarantee."

Puerto Rico has insufficient funds to meet all of its maturing obligations, which amount to more than $1 billion, due in the next few weeks, and will have to decide which debts to pay, and on which debts to default.

"Everyone can speculate, but if you look at the market, it believes that the GO bonds due in January will get paid," said Vasileios Sfyris, managing partner of First Southern Securities, a broker-dealer that owns and advises clients with financial interests in Puerto Rico muni bonds.