Puerto Rico Governor Alejandro Garcia Padilla announced on Wednesday that the Commonwealth will selectively default on some $37 million worth of smaller agency bonds next month, but that it plans to pay the $350 million due towards its general obligation bonds.

Financial analysts point out a default on the general obligations notes would have been considered more serious as those bonds have the strongest legal protections of any of Puerto Rico’s debts.

The commonwealth will, however, default on $35.9 million of Puerto Rico Infrastructure Financing Authority and $1.4 million of Public Finance Corp. bonds.

In answering a question regarding the possibility of the shutdown of key government services, Garcia Padilla noted in the conference call with the media: “We have to do all we can to avoid that situation.”

Velazquez PR puerto Rico credit default swaps CDS
Chart via S&P CapIQ

More on Puerto Rico selective default on bonds

The governor explained in the presser that the lack of a legal framework to restructure debt has resulted in no choice but to decide which payments can be made with the available resources.

Garcia Padilla has been warning investors for months that he would choose to keep residents safe and healthy if it came down to paying debts or paying for essential services. Analysts also point out that the commonwealth’s constitution requires that general-obligation bonds be repaid before other expenses.

Earlier this month, the governor began to redirect revenue used to repay some agency debt to the central government. This has led to Puerto Rican government agencies including the Infrastructure Financing Authority, the Highways & Transportation Authority and the Convention Center District Authority announcing that they will pull funds out of reserves to help make the required payments to investors on the first of the year.

So far just one Puerto Rico governmental unit has missed debt payments. The Public Finance Corp. (which borrows to help cover the government’s budget deficits) did not pay principal and interest on notes because lawmakers didn’t appropriate the funds). PFC bonds maturing in 2031 trade are currently trading at six cents on the dollar. However, given that these bonds have weaker legal protections than other securities, the impact on PR’s remaining debt has been minimal.