Moment of truth as Puerto Rico faces crucial debt payment

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Puerto Rico Debt Deadline Looms


Puerto Rico faces a moment of truth on Tuesday, as the island owes a $355 million payment - a possible default which could trigger lawsuits, further spook investors and undermine the island's efforts to climb out of $72 billion in debt.

The payment on bonds issued by the U.S. commonwealth's financing arm, the Government Development Bank (GDB), are crucial as Puerto Rico tries to stretch its liquidity into 2016 to give itself more time to restructure debt. A default is seen as possible but not definite.

LEARN MORE: Puerto Rico is in a 24-hour debt showdown again

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 U.S.

Governor Alejandro Garcia Padilla wants to overhaul spending and restructure debt, but bondholders are resisting cuts to repayments, and restructuring discussions look to take months.

Of the payment owed on Tuesday, $273 million is protected by Puerto Rico's constitution - so-called general obligation, or GO, debt - so defaulting would likely trigger lawsuits.

Even a default on the non-GO portion could result in litigation against the GDB. "Of course" creditors would sue, said one creditor-side source. "It would be really messy."

Lawsuits could hinder the island's ongoing efforts to get creditors to cooperate on a universal bond exchange, or "superbond," that would reduce its overall debt.

Puerto Rico has defaulted before, in August paying only $628,000 of a $58 million payment due on its Public Finance Corp bonds.

But a default on GO debt would have a bigger market impact, given its constitutional protections.

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Moment of truth as Puerto Rico faces crucial debt payment
A homeless man stands in front of a closed down fast food restaurant in the colonial district of Old San Juan, Puerto Rico, Sunday, Aug. 2, 2015. As Puerto Rico's economy continues to decline a list of cost-cutting measures proposed by a group of hedge funds that holds $5.2 billion of Puerto Ricoâs debt has riled islanders: laying off teachers; cutting Medicaid benefits; and reducing subsidies to the main public university. (AP Photo/Ricardo Arduengo)
FILE - In this Aug. 2, 2015, file photo, a homeless man stands in front of a closed down business in Puerta de Tierra in the outskirts of Old San Juan, Puerto Rico. Puerto Rico is staggering under a $72 billion public debt load in 2015, that its governor has said the U.S. territory cannot pay and must restructure. (AP Photo/Ricardo Arduengo, File)
A private security guard sits in front of a closed down business in the colonial district of Old San Juan, Puerto Rico, Sunday, Aug. 2, 2015. In the ongoing economic crisis Puerto Rico's debt-burdened power utility already charges rates that on average are twice those of the mainland, and is under pressure from bondholders to raise them higher (AP Photo/Ricardo Arduengo)
A protestor holds a sign that reads in Spanish: "We didn't take out a loan. We didn't see a dime. We're not going to pay." during a protest in the financial district demanding the island's public debt not be paid to bondholders in San Juan, Puerto Rico, Wednesday, July 15, 2015. Protesters gathered at what is known as The Golden Mile to demand the banking industry take responsibility for the current economic crisis. This month Gov. Alejandro Garcia Padilla said Puerto Rico's outstanding $72 billion public debt is unpayable given the island's long recession. (AP Photo/Ricardo Arduengo)
Protestors Block traffic in the financial district to demand the island's public debt not be paid to bondholders in San Juan, Puerto Rico, Wednesday, July 15, 2015. Protesters gathered at what is known as The Golden Mile to demand the banking industry take responsibility for the current economic crisis. This month Gov. Alejandro Garcia Padilla said Puerto Rico's outstanding $72 billion public debt is unpayable given the island's long recession. (AP Photo/Ricardo Arduengo)
A pedestrian crosses the street as protestors block traffic in the financial district to demand the banking industry take responsibility for the current economic crisis in San Juan, Puerto Rico, Wednesday, July 15, 2015. Protesters gathered along what is known locally as The Golden Mile to demand the island's public debt not be paid back. This month Gov. Alejandro Garcia Padilla said Puerto Rico's outstanding $72 billion public debt is unpayable given the island's long recession. (AP Photo/Ricardo Arduengo)
A man plays an electronic slot machine at a virtual casino in the Rio Piedras neighborhood of San Juan, Puerto Rico, Wednesday, July 1, 2015, the day a 11.5% sales tax goes into effect, the highest of any U.S. state. The island's administration has been pushing for Congress to let the government and public agencies seek bankruptcy protection, while the White House has said no one is contemplating a federal bailout of Puerto Rico. (AP Photo/Ricardo Arduengo)
SAN JUAN, PUERTO RICO - JULY 01: A for sale sign is seen hanging from a balcony next to a Puerto Rican flag in Old San Juan as the island's residents deal with the government's $72 billion debt on July 1, 2015 in San Juan, Puerto Rico. Governor of Puerto Rico Alejandro García Padilla said in a speech recently that the people of Puerto Rico will have to make sacrifices and share the responsibilities to help pull the island out of debt. (Photo by Joe Raedle/Getty Images)
SAN JUAN, PUERTO RICO - JULY 01: The Puerto Rican flag flies near the Capitol building as the island's residents deal with the government's $72 billion debt on July 1, 2015 in San Juan, Puerto Rico. Governor of Puerto Rico Alejandro García Padilla said in a speech recently that the people of Puerto Rico will have to make sacrifices and share the responsibilities to help pull the island out of debt. (Photo by Joe Raedle/Getty Images)
SAN JUAN, PUERTO RICO - JULY 01: Yessenia Puente packs up her apartment as she prepares to move to Orlando, Florida this weekend on July 1, 2015 in San Juan, Puerto Rico. Puente joins a mass exodus of people fleeing the island due to increasing economic hardships and a financial crisis that has resulted in an estimated $72 billion public debt for the Puerto Rican government, which the governor has said is unpayable. The workers for the moving company, La Rosa del Monte, said that she is number 1465 that the company has packed for Orlando since the beginning of the year. (Photo by Joe Raedle/Getty Images)
SAN JUAN, PUERTO RICO - JULY 01: Luis Davila with La Rosa del Monte movers pack up Yessenia Puente's apartment as she prepares to move to Orlando, Florida this weekend on July 1, 2015 in San Juan, Puerto Rico. Puente joins a mass exodus of people fleeing the island due to increasing economic hardships and a financial crisis that has resulted in an estimated $72 billion public debt for the Puerto Rican government, which the governor has said is unpayable. The workers for the moving company, La Rosa del Monte, said that she is number 1465 that the company has packed for Orlando since the beginning of the year. (Photo by Joe Raedle/Getty Images)
A street performer in a Mickey Mouse costume rests on a bench in Old San Juan, Puerto Rico, Wednesday, July 1, 2015, the day a 11.5% sales tax went into effect, the highest of any U.S. state. The island's administration has been pushing for Congress to let the government and public agencies seek bankruptcy protection, while the White House has said no one is contemplating a federal bailout of Puerto Rico. (AP Photo/Ricardo Arduengo)
People walk through a shopping area in Rio Piedras where many businesses have closed in San Juan, Puerto Rico, Wednesday, July 1, 2015, the day a 11.5% sales tax went into effect, the highest of any U.S. state. The island's administration has been pushing for Congress to let the government and public agencies seek bankruptcy protection, while the White House has said no one is contemplating a federal bailout of Puerto Rico. (AP Photo/Ricardo Arduengo)
SAN JUAN, PUERTO RICO - JUNE 30: Hilda Soto has breakfast as she reads a newspaper article about the speech Puerto Rican Governor Alejandro Garcia Padilla gave regarding the governments $73 billion debt on June 30, 2015 in San Juan, Puerto Rico. Soto said that she believes it's the moment for the island to go independent, as the Governor said in his speech that the people will have to sacrifice and share in the responsibilities for pulling the island out of debt. (Photo by Joe Raedle/Getty Images)
A man plays his guitar while he begs for money in front of a closed down business in Old San Juan, Puerto Rico, Monday, June 29, 2015. International economists released a critical report on Puerto Rico's economy Monday on the heels of the governor's warning that the island can't pay its $72 billion public debt. (AP Photo/Ricardo Arduengo)
SAN JUAN, PUERTO RICO - JUNE 30: Tourists walk past a boarded up business in Old San Juan a day after the Puerto Rican Governor Alejandro Garcia Padilla gave a televised speech regarding the governments $72 billion debt on June 30, 2015 in San Juan, Puerto Rico. The Governor said in his speech that the people will have to sacrifice and share in the responsibilities for pulling the island out of debt. (Photo by Joe Raedle/Getty Images)
SAN JUAN, PUERTO RICO - JUNE 30: An American flag and Puerto Rican flag fly next to each other in Old San Juan a day after the Puerto Rican Governor Alejandro Garcia Padilla gave a televised speech regarding the governments $72 billion debt on June 30, 2015 in San Juan, Puerto Rico. The Governor said in his speech that the people will have to sacrifice and share in the responsibilities for pulling the island out of debt. (Photo by Joe Raedle/Getty Images)
People walk on the street in front of the governor’s mansion on the background in Old San Juan, Puerto Rico, Monday, June 29, 2015. International economists released a critical report on Puerto Rico's economy Monday on the heels of the governor's warning that the island can't pay its $72 billion public debt.(AP Photo/Ricardo Arduengo)
A man stands in front of a jewelry store in the neighborhood of Rio Piedras in San Juan, Puerto Rico, Monday, June 29, 2015. The jewelry itself is surrounded by closed down businesses. International economists released a critical report on Puerto Rico's economy Monday on the heels of the governor's warning that the island can't pay its $72 billion public debt. (AP Photo/Ricardo Arduengo)
A man in a local bar watches Puerto Rico’s governor Alejandro Garcia Padilla on television delivering an address on the state of the island's finances, in San Juan, Puerto Rico, Monday, June 29, 2015. The governor said that he will form a financial team to negotiate with bondholders on delaying debt payments and then restructuring $72 billion in public debt that he says the island can't repay. (AP Photo/Ricardo Arduengo)
SAN JUAN, PUERTO RICO - JUNE 29: (L-R) Luis Santini Rivera, Guillermo Corporal and Jose Acevedo watch as Puerto Rican Governor Alejandro Garcia Padilla addresses the island's residents in a televised broadcast regarding the governments $73 billion debt on June 29, 2015 in San Juan, Puerto Rico. The governor said that the people on the island will have to sacrifice and share in the responsibilities for pulling the island out of debt. (Photo by Joe Raedle/Getty Images)
SAN JUAN, PUERTO RICO - JUNE 30: People use a Banco Popular ATM machine a day after Puerto Rican Governor Alejandro Garcia Padilla gave a televised speech regarding the governments $72 billion debt on June 30, 2015 in San Juan, Puerto Rico. The Governor said in his speech that the people will have to sacrifice and share in the responsibilities for pulling the island out of debt. (Photo by Joe Raedle/Getty Images)
SAN JUAN, PUERTO RICO - JUNE 30: Police officers close off a street near the Governors Mansion as taxi drivers protest the Uber service in Old San Juan a day after the Puerto Rican Governor Alejandro Garcia Padilla gave a televised speech regarding the governments $72 billion debt on June 30, 2015 in San Juan, Puerto Rico. The governor said in his speech that the people will have to sacrifice and share in the responsibilities for pulling the island out of debt. (Photo by Joe Raedle/Getty Images)
SAN JUAN, PUERTO RICO - JUNE 30: Jessaily Otero (L) and Yarie Paris relax at a cafe a day after Puerto Rican Governor Alejandro Garcia Padilla gave a televised speech regarding the governments $72 billion debt on June 30, 2015 in San Juan, Puerto Rico. The Governor said in his speech that the people will have to sacrifice and share in the responsibilities for pulling the island out of debt. (Photo by Joe Raedle/Getty Images)
SAN JUAN, PUERTO RICO - JUNE 30: Pedestrians walk past a building tagged with graffiti a day after Puerto Rican Governor Alejandro Garcia Padilla gave a televised speech regarding the governments $72 billion debt on June 30, 2015 in San Juan, Puerto Rico. The Governor said in his speech that the people will have to sacrifice and share in the responsibilities for pulling the island out of debt. (Photo by Joe Raedle/Getty Images)
SAN JUAN, PUERTO RICO - JUNE 30: Rosaura Guzman waits for customers at John Cafe a day after Puerto Rican Governor Alejandro Garcia Padilla gave a televised speech regarding the governments $72 billion debt on June 30, 2015 in San Juan, Puerto Rico. The Governor said in his speech that the people will have to sacrifice and share in the responsibilities for pulling the island out of debt. (Photo by Joe Raedle/Getty Images)
The U.S. and Puerto Rico flags wave in front of the governor’s mansion in Old San Juan, Puerto Rico, Monday, June 29, 2015. International economists released a critical report on Puerto Rico's economy Monday on the heels of the governor's warning that the island can't pay its $72 billion public debt. (AP Photo/Ricardo Arduengo)
SAN JUAN, PUERTO RICO - JUNE 30: Rolando Santiago (2nd R), who lost his job at pharmacutical company, along with other people wait for help at an unemployment office a day after Puerto Rican Governor Alejandro Garcia Padilla gave a televised speech regarding the governments $72 billion debt on June 30, 2015 in San Juan, Puerto Rico. The Governor said in his speech that the people will have to sacrifice and share in the responsibilities for pulling the island out of debt. (Photo by Joe Raedle/Getty Images)
SAN JUAN, PUERTO RICO - JUNE 29: People walk through the streets after Puerto Rican Governor Alejandro Garcia Padilla gave a speech regarding the government's $72 billion debt on June 29, 2015 in San Juan, Puerto Rico. The Governor said in his speech that the people will have to sacrifice and share in the responsibilities for pulling the island out of debt. (Photo by Joe Raedle/Getty Images)
SAN JUAN, PUERTO RICO - JUNE 30: The Puerto Rican flag flies above the Capitol a day after Puerto Rican Governor Alejandro Garcia Padilla gave a televised speech regarding the governments $72 billion debt on June 30, 2015 in San Juan, Puerto Rico. The Governor said in his speech that the people will have to sacrifice and share in the responsibilities for pulling the island out of debt. (Photo by Joe Raedle/Getty Images)
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"There would be a new round of selling pressure," said John Miller, co-head of fixed income for Nuveen Asset Management. If Puerto Rico defaults on debt guaranteed by the commonwealth, the chance of it making another GO bond payment due on Jan. 1 "would drop precipitously," Miller added.

A default could also hinder public services. Daniel Hanson, a Height Securities analyst closely following Puerto Rico, said in a Nov. 25 note that a default could put GDB into receivership, which would "almost certainly result ... in a stay" on its ability to move cash and, in turn, on the government's ability to support operations.

Moody's Investment Service last month said it was "likely" Puerto Rico would default on at least some of the debt, and Garcia Padilla has said that if forced to choose between paying debt and providing services, Puerto Rico would default.

Lately, though, "there's been a change in tone" on the government's part, said the creditor-side source. Puerto Rican officials are aware that a default could risk creditors' cooperation on the superbond, and are likely to make the December and January payments to keep talks alive, said the source, as well as another person familiar with discussions.

Garcia Padilla will also speak on Tuesday at a U.S. Senate Judiciary Committee hearing to discuss potential fixes for Puerto Rico.

(Reporting by Nick Brown; Editing by Bernard Orr)

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