- Island will fail to pay $37 million of almost $1 billion owed
- Commonwealth will pay debt backed by constitutional guarantee
Puerto Rico’s general-obligation bonds rallied, with some yields falling to the lowest since July, after officials said the commonwealth would pay all that it owed on the constitutionally protected debt while missing payments on other securities.
The island’s benchmark general obligations issued in March 2014 with an 8 percent coupon traded Monday at an average 73.6 cents on the dollar, to yield 11.4 percent. It’s the highest price since Dec. 11. The yield on securities due in July 2041, the second-most-traded Puerto Rico obligations of the day, touched 9.3 percent, the lowest since July.
Puerto Rico Governor Alejandro Garcia Padilla said last week that the island would default on $37 million of the almost $1 billion in bond payments due Jan. 1 and divert revenue to make others. It will fail to pay on $35.9 million of non-commonwealth guaranteed Puerto Rico Infrastructure Financing Authority debt and $1.4 million of Public Finance Corp. bonds.
By contrast, the commonwealth’s constitution guarantees payment on general obligations before anything else.
“Puerto Rico opted for a default that would send a message about the need for Chapter 9 and the potential for a humanitarian crisis on the island without triggering a wave of litigation,” Mark Palmer, a managing director at BTIG LLC who analyzes Puerto Rico and municipal bond insurers, wrote Monday in a report. He said he expects insurers’ losses on commonwealth debt will be less than some predictions.
Puerto Rico owes $331 million in interest payments across its various securities in February, data compiled by Bloomberg show. It’s the largest bill until $432 million in May. The payments swell to almost $2 billion in July, when some general obligations mature.