Puerto Rico has avoided default on Tuesday by paying on debt that was maturing but has warned that its liquidity continues to deteriorate which means future defaults could take place.
There was speculation that the U.S. owned territory would end up defaulting on Tuesday on all or part of its $355 million notes that were issued by the Government Development Bank.
While in August, Puerto Rico first defaulted and failing to make a payment Tuesday would have been very significant because part of the debt had been protected by the constitution of the commonwealth.
Another default would have cause lawsuits, further worried investors and undermine the efforts of the island to climb out of its debt of $72 billion.
In a prepared statement, the rating agency Moody’s said that the payment does not change its rating or its outlook for debt in Puerto Rico.
The payment indicated that the territory has made an effort to avoid any litigation and to prevent the future deterioration in its relations with creditors, said Moody’s, but the agency would continue with its view that default was likely on future debt payment of the commonwealth.
Puerto Rico’s 8% General Obligation bond was able to rally to an average price that traded at 75 cents on the U.S. dollar, with a yield that dropped to 11.16% versus a Monday yield of 11.808%.
Puerto Rico announced that it made its debt payment despite extreme challenges fiscally. It warned that problems lie ahead as it has to claw back more revenues pledged to bonds issued so if can maintain public services on the island, said its Governor Alejandro Garcia Padilla.
The clawbacks would be used by the commonwealth to fund the payments on debt that is top priority carrying constitutional protections, said Garcia Padilla in testimony that was written.
However, in his oral testimony, he commented that clawbacks could be used as well to maintain the island’s public services.
Garcia Padilla signed on order that allowed Puerto Rico to start redirecting some funds in light of the newly revised estimates for revenue and its deteriorating situation with liquidity, said the island government.
Of the more than $355 million that was paid Tuesday, $81.4 million went to non-general obligation debt and over $273.2 million for notes that were backed by the general obligation guarantee of the commonwealth.