Puerto Rico is running out of cash.

Puerto Rico said it made all principal and interest bond payments due Tuesday, averting a default on directly guaranteed debt and allowing the commonwealth to continue talks with creditors to reduce its $70 billion debt burden.

Governor Alejandro Garcia Padilla signed an executive order to permit the redirection of revenue budgeted for the debt service of some public corporations to pay for government expenses and debt issued or guaranteed by the commonwealth, according to a Government Development Bank statement. The GDB, which lends to the commonwealth and its agencies, has $354 million in principal and interest payments due Tuesday.

Garcia Padilla announced the so-called clawback provision during a Senate hearing Tuesday on the commonwealth’s finances and request to access bankruptcy. The governor has said the island is running out of cash and will focus on providing essential services while in negotiations with creditors to accept losses on their holdings.

Of the $354 million in payments due, $267 million of the bonds are guaranteed by Puerto Rico. A missed payment on those securities would have been the first default on the commonwealth’s direct debt. A Puerto Rico agency skipped a debt payment in August on bonds repaid through legislative appropriation.

Clawback Provision

The commonwealth said in a Nov. 6 financial filing that it may take revenue already used to repay Highways and Transportation Authority bonds, convention-center debt, and Puerto Rico Infrastructure Financing Authority bonds and redirect that money to pay down general-obligation securities. Those authorities have approximately $7 billion of debt, Garcia Padilla said in his written testimony to the Senate committee. Still, the clawback may not give Puerto Rico enough revenue, according to the Nov. 6 financial filing.

“Even assuming the use of these revenues, the commonwealth may not have sufficient funds to service all principal and interest on its general obligation debt without significantly curtailing government operations,” according to the Nov. 6 document.

A default on commonwealth-guaranteed debt could have prompted legal action by investors because those bonds are backed by Puerto Rico’s promise to repay. Officials are negotiating with investors to reduce the island’s debt load by accepting losses through a debt exchange or delaying principal payments.

The island faces another debt deadline on Jan. 1 when $357 million of general-obligation interest is due. Garcia Padilla’s administration has said for months that paying for essential services and programs is the government’s first priority. Officials have delayed tax rebates, suspended payments to suppliers and relied on intergovernmental borrowing to help the cash-strapped island maintain core services.

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