MCO Moodys Corp

By Aaron Kuriloff 

Gov. Alejandro Garcia Padilla said Puerto Rico will make the most crucial of its roughly $1 billion in bond payments due Jan. 1, a strategy he said was aimed at staving off creditor lawsuits that could exacerbate a financial crisis.

The U.S. commonwealth will pay about $330 million in general obligation debt, which is guaranteed by the island's constitution, after redirecting some money from bonds with weaker legal protections, Mr. Padilla said in a conference call with reporters.

The commonwealth's trustees will tap reserves to pay another $383 million of the debt, including bonds from the highway and convention center authorities. It will miss payment on about $37 million due on bonds from the Infrastructure Financing Authority and the Public Finance Corp.

Those defaults are the latest from Puerto Rico, which owes investors about $70 billion and has struggled with a decadelong recession and a shrinking population that this year led Mr. Padilla to declare its debts unpayable.

The government began missing bond payments in August and is threatening to skip even more in the months ahead, possibly leading to legal battles of increasing complexity as its coffers empty.

The payments are likely among the last Puerto Rico will make in coming months, according to Mr. Padilla, who said on Wednesday that the government's efforts would leave reserve accounts depleted.

The commonwealth will continue to pay bonds backed by sales taxes, known by the Spanish acronym Cofina , but it doesn't have access to that money to redirect it, Melba Acosta, president of the island's Government Development Bank told reporters in the conference call.

"What we've seen so far suggests a very strong desire to avoid default on general obligation bonds and government-guaranteed securities, and that's consistent with the knowledge that the government will find itself in deep litigation as soon as it does," said Ted Hampton, an analyst at Moody's Investors Service, in an interview last week.

Fear of expensive and expanding litigation has sent Puerto Rico to the U.S. Congress asking for bankruptcy protection. The Obama administration and congressional Democrats have called for Congress to pass legislation that would allow the territory to restructure its debt, but Republicans blocked an effort to grant such a restructuring authority in the annual spending bill lawmakers passed earlier this month.

Puerto Rico needs swift congressional action to create an orderly restructuring process, a Treasury spokesman said on Wednesday. "Puerto Rico is at a dead end, shifting funds from one creditor to pay another and diverting money from already-depleted pension funds to pay both current bills and debt service," he said.

Efforts in Congress face opposition from some investors, who say changing Puerto Rico's status isn't needed and sets a bad precedent for states in financial distress. Several have argued for a negotiated approach exemplified by talks involving the Puerto Rico Electric Power Authority, which signed a deal with 70% of its creditors that will see it make its scheduled payments.

The announced Jan. 1 defaults are "remarkably mild" given the commonwealth's repeated warnings about its dwindling resources, wrote Daniel Hanson, an analyst at the Washington-based investing firm Height Securities, in a report on Wednesday. That could hurt its credibility with the U.S. Congress, and because the island's cash flows in 2015 have been higher than expected, "investors should take the governor's claims about future bond payments with a grain of salt," he said.

Joseph Rosenblum, director of municipal credit research at AllianceBernstein, said the payment strategy only buys Puerto Rico some time. "It does not say or do anything about their severe liquidity crisis, their need to make future payments or the need to continue to work on turning around their economy," he said.

Some Puerto Rico general obligation bonds maturing in 2035 traded at 73 cents on the dollar on Wednesday, up from about 71.75 cents on Tuesday.

Puerto Rico's economic problems have been compounded by migration to the U.S. The Census Bureau reported last week that the island's population fell by 1.7% in the year ended June. Its population now stands nearly 10% below the level of July 2004.

Nick Timiraos and Lora Western contributed to this article.

Write to Aaron Kuriloff at aaron.kuriloff@wsj.com

(END) Dow Jones Newswires

December 30, 2015 16:58 ET (21:58 GMT)

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