Deadline Draws Near for Puerto Rico
Investors are bracing for Puerto Rico to miss about $58 million in bond payments in coming days, as the U.S. commonwealth attempts to restructure $72 billion of debt.
Saturday’s deadline could mark the first skipped payment to bondholders since Gov. Alejandro Garcia Padilla last month said that the island’s debts were unsustainable and urged negotiations with creditors. Because Saturday is a weekend, payment can be made Monday, a spokeswoman for Puerto Rico said.
Public Finance Corp., a financing unit for Puerto Rico’s government, this month notified holders of appropriation bonds, typically those backed by funds set aside by the legislature, that it hadn’t transferred money to a trustee to pay the debt due at the beginning of August. The corporation said the legislature never actually appropriated the funds. The missed transfer led some ratings firms to say the island was highly likely to default.
Some bonds from Public Finance Corp. maturing in 2031 touched a record low below 12 cents on the dollar this week, according to the Electronic Municipal Market Access website.
Investors have braced for a cascade of defaults since last month, when Mr. Garcia Padilla called for talks with bondholders to delay some payments.
Many investors are Puerto Rico residents who bought the debt seeking stable, tax-free income and already have suffered losses as the commonwealth’s credit ratings fell to junk status and bond prices plummeted. Residents who bought Puerto Rico municipal-bond funds from UBS Group AG’s Puerto Rico brokerage unit, such as Hall of Fame boxer Felix Trinidad, have been hit hard by the declining bond prices, and some are filing legal claims against the unit to recoup losses. Damages claimed by investors have exceeded $1.1 billion, UBS said in a regulatory filing this week.
A nonpayment would be another setback for Puerto Rico’s 3.5 million residents, who already have struggled with a decade of economic stagnation and high unemployment, highlighting the breadth of the commonwealth’s financial woes as it attempts to preserve its cash, avoid a government shutdown and pay its creditors.
“The real challenge with Puerto Rico is that most of the costs in their restructuring are going to be borne by Puerto Ricans, whether it’s ratepayers, taxpayers, service recipients or bondholders,” said Matt Fabian, partner at Concord, Mass.-based research firm Municipal Market Analytics. Mr. Fabian said if Puerto Rico defaults, it would be the largest in the history of the $3.7 trillion market for debt sold by U.S. state and local governments.
Puerto Rico’s Government Development Bank recently said it would attempt to exchange or buy back outstanding bonds at prices below face value. Economists hired by hedge funds that hold some of Puerto Rico’s debt said this week that the island can solve its debt problems largely by increasing tax collections and implementing service cuts.
A substantial amount of bonds from Public Finance Corp. and the development bank are held by Puerto Rico residents, particularly island credit unions, according to Daniel Hanson, an analyst at Washington-based investment firm Height Securities LLC. Puerto Rico investors tend to be concentrated in some of the more risky bonds, in part because they were sold with extra tax breaks for island residents, he said.
“For a lot of Puerto Ricans, this is a main source of retirement income,” he said. About half of municipal-bond mutual funds in the U.S. have some exposure to Puerto Rico’s debt, according to research firm Morningstar Inc.
The credit unions, known as cooperatives, which have about one million members and almost $9 billion in assets, have diversified their holdings, boosting cash reserves and insurance to mitigate any losses in Puerto Rico debt, said Daniel Rodriguez Collazo, executive president of Cooperatives Supervision and Insurance Corp., which regulates and insures the credit unions. The cooperatives have also assembled a team of lawyers, economists and financial advisers to negotiate with the government.
Credit unions are owed about $40 million in August, and most of their government debt matures in five years or greater, he said. “Our cooperatives have the capital, the assets and the liquidity for any unpaid bonds they’ve invested in,” Mr. Rodriguez Collazo said. “Operations of our financial institutions won’t be affected.”
A group of Puerto Rico policy makers is working on a restructuring plan and scheduled to present its findings at the end of August. Creditors, including mutual funds, hedge funds and other distressed-debt investors, have been splitting into committees based on which bonds they own.
Puerto Rico has said its debt includes about $18.6 billion of general obligation bonds and government-guaranteed debt, $15.2 billion of sales-tax-backed bonds, and $24.1 billion of bonds issued by government agencies, like the Puerto Rico Electric Power Authority, which is already negotiating a restructuring with creditors. Many investors hold bonds across the different sectors, each of which could recover different amounts in a restructuring.
Under U.S. law, Puerto Rico, unlike cities such as Detroit, can’t seek protection under chapter 9 of the U.S. Bankruptcy Code. All states are barred from filing for bankruptcy protection. Puerto Rico is lobbying Congress for a law to allow some of its entities to access chapter 9 protections. The island’s leaders must negotiate with creditors without that process.
“I think it’s going to get incredibly messy,” said Nick Venditti, portfolio manager at Santa Fe, N.M.-based Thornburg Investment Management, which oversees about $11 billion in tax-exempt debt.
—Mike Cherney contributed to this article.
Write to Aaron Kuriloff at AARON.KURILOFF@wsj.com
Demonstrators march on Park Avenue in New York on Thursday, protesting proposed austerity measures for Puerto Rico. PHOTO: JESSICA DINAPOLI/REUTERS
Deadline Draws Near for Puerto Rico
Saturday’s deadline could mark the first skipped payment to bondholders since Gov. Alejandro Garcia Padilla last month said that the island’s debts were unsustainable and urged negotiations with creditors. Because Saturday is a weekend, payment can be made Monday, a spokeswoman for Puerto Rico said.
Public Finance Corp., a financing unit for Puerto Rico’s government, this month notified holders of appropriation bonds, typically those backed by funds set aside by the legislature, that it hadn’t transferred money to a trustee to pay the debt due at the beginning of August. The corporation said the legislature never actually appropriated the funds. The missed transfer led some ratings firms to say the island was highly likely to default.
Some bonds from Public Finance Corp. maturing in 2031 touched a record low below 12 cents on the dollar this week, according to the Electronic Municipal Market Access website.
Investors have braced for a cascade of defaults since last month, when Mr. Garcia Padilla called for talks with bondholders to delay some payments.
Many investors are Puerto Rico residents who bought the debt seeking stable, tax-free income and already have suffered losses as the commonwealth’s credit ratings fell to junk status and bond prices plummeted. Residents who bought Puerto Rico municipal-bond funds from UBS Group AG’s Puerto Rico brokerage unit, such as Hall of Fame boxer Felix Trinidad, have been hit hard by the declining bond prices, and some are filing legal claims against the unit to recoup losses. Damages claimed by investors have exceeded $1.1 billion, UBS said in a regulatory filing this week.
A nonpayment would be another setback for Puerto Rico’s 3.5 million residents, who already have struggled with a decade of economic stagnation and high unemployment, highlighting the breadth of the commonwealth’s financial woes as it attempts to preserve its cash, avoid a government shutdown and pay its creditors.
“The real challenge with Puerto Rico is that most of the costs in their restructuring are going to be borne by Puerto Ricans, whether it’s ratepayers, taxpayers, service recipients or bondholders,” said Matt Fabian, partner at Concord, Mass.-based research firm Municipal Market Analytics. Mr. Fabian said if Puerto Rico defaults, it would be the largest in the history of the $3.7 trillion market for debt sold by U.S. state and local governments.
Puerto Rico’s Government Development Bank recently said it would attempt to exchange or buy back outstanding bonds at prices below face value. Economists hired by hedge funds that hold some of Puerto Rico’s debt said this week that the island can solve its debt problems largely by increasing tax collections and implementing service cuts.
A substantial amount of bonds from Public Finance Corp. and the development bank are held by Puerto Rico residents, particularly island credit unions, according to Daniel Hanson, an analyst at Washington-based investment firm Height Securities LLC. Puerto Rico investors tend to be concentrated in some of the more risky bonds, in part because they were sold with extra tax breaks for island residents, he said.
“For a lot of Puerto Ricans, this is a main source of retirement income,” he said. About half of municipal-bond mutual funds in the U.S. have some exposure to Puerto Rico’s debt, according to research firm Morningstar Inc.
The credit unions, known as cooperatives, which have about one million members and almost $9 billion in assets, have diversified their holdings, boosting cash reserves and insurance to mitigate any losses in Puerto Rico debt, said Daniel Rodriguez Collazo, executive president of Cooperatives Supervision and Insurance Corp., which regulates and insures the credit unions. The cooperatives have also assembled a team of lawyers, economists and financial advisers to negotiate with the government.
Credit unions are owed about $40 million in August, and most of their government debt matures in five years or greater, he said. “Our cooperatives have the capital, the assets and the liquidity for any unpaid bonds they’ve invested in,” Mr. Rodriguez Collazo said. “Operations of our financial institutions won’t be affected.”
A group of Puerto Rico policy makers is working on a restructuring plan and scheduled to present its findings at the end of August. Creditors, including mutual funds, hedge funds and other distressed-debt investors, have been splitting into committees based on which bonds they own.
Puerto Rico has said its debt includes about $18.6 billion of general obligation bonds and government-guaranteed debt, $15.2 billion of sales-tax-backed bonds, and $24.1 billion of bonds issued by government agencies, like the Puerto Rico Electric Power Authority, which is already negotiating a restructuring with creditors. Many investors hold bonds across the different sectors, each of which could recover different amounts in a restructuring.
Under U.S. law, Puerto Rico, unlike cities such as Detroit, can’t seek protection under chapter 9 of the U.S. Bankruptcy Code. All states are barred from filing for bankruptcy protection. Puerto Rico is lobbying Congress for a law to allow some of its entities to access chapter 9 protections. The island’s leaders must negotiate with creditors without that process.
“I think it’s going to get incredibly messy,” said Nick Venditti, portfolio manager at Santa Fe, N.M.-based Thornburg Investment Management, which oversees about $11 billion in tax-exempt debt.
—Mike Cherney contributed to this article.
Write to Aaron Kuriloff at AARON.KURILOFF@wsj.com
Demonstrators march on Park Avenue in New York on Thursday, protesting proposed austerity measures for Puerto Rico. PHOTO: JESSICA DINAPOLI/REUTERS
Investors are bracing for the island to default on about $58 million in bond payments in coming days
By Aaron KuriloffDeadline Draws Near for Puerto Rico
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