Puerto Rico Has Three Months’ Worth Of Cash

Puerto Rico will run out of money in three months and its government be forced to shut down unless it manages to pass tax reform measures and finalize a budget, wrote Puerto Rico Government Development Bank head David Chafey Jr in a letter to the heads of the Puerto Rican Senate and House.

“For us to be able to borrow from traditional investors or hedge fund investors, they will say show me your plan and show your budget,” said Chafey, reports Michael Corkery for the New York Times.



Puerto Rico Muni

Chafey trying to force legislative action

Puerto Rico has been struggling with high debt and weak growth for a couple of years now, and a bond issue last year was supposed to give it enough time (ie liquidity) to push through difficult reform measures and get its budget under control, and at least headed toward balanced. That has happened, and when a restructuring law was struck down in February it put investors on notice that the commonwealth is still very much at risk of default.



It’s understandable why Chafey would want to spur legislative action. He knows that the $2.95 billion bond issue that could avoid default doesn’t have a realistic chance of finding buyers unless there is some progress on structural reform, controversial though it may be. Even then Puerto Rico is looking at selling bonds to Hedge Funds at a high rate, but the alternative may simply be being shut out of capital markets (or facing double digit rates, which amounts to the same thing).

Gundlach, other hedge fund managers still investing in Puerto Rico

Just yesterday Bloomberg’s Michelle Kaske reported that DoubleLine Capital’s Jeffrey Gundlach had invested $20 million in Puerto Rico munis between the beginning of the year and the end of February. Gundlach is still confident that Puerto Rico will manage to pull through without default, and Puerto Rican bonds offer a combination of high yields and tax exempt status that’s extremely tempting in market starved for yield. John Paulson of Paulson & Co has also been actively investing in Puerto Rico, so there’s no lack of interest from investors who can afford to wait for an eventual recovery. But even they will eventually want to see signs that the island can get its reform plans back on track.



By: Michael Ide

Puerto Rico Has Three Months’ Worth Of Cash

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