Puerto Rico bondholders present debt plan

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Puerto Rico can avoid a sweeping restructuring of its sprawling $72bn debt pile by focusing on eliminating its deficit and borrowing in the short term, according to a report commissioned by an ad hoc group of the island’s bondholders and authored by three former International Monetary Fund economists.
The report released late on Sunday represents the first major salvo from the bondholders group which represents 38 investment groups — including hedge funds girded for a battle against any writedown of their debt — and $5.2bn of mostly government-guaranteed and tax-supported debt.
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Last month Puerto Rico’s governor, Alejandro Garcia Padilla, said his government would seek to restructure its liabilities, calling for shared sacrifice after years of economic recession and deficit borrowing have come to a head for the US commonwealth.
Mr Padilla was relying on a different report from another former IMF official, Anne Krueger, which painted a bleaker picture the island’s finances.
The latest report argues instead that Puerto Rico has the ability to move to a surplus by fiscal year 2017, which begins on July 1 2016, based largely on reforms already identified in Ms Krueger’s plan.
Still, the authors acknowledge that Puerto Rico is cash-strapped in the short term and would need some kind of financing to bridge the gap. The commonwealth would need about $2.5bn in 2016.
Indeed, Puerto Rico could default on bond payments of one of its debt-issuing entities as soon as August 1.
“Puerto Rico can avoid a costly default,” said Jose Fajgenbaum, a director at Centennial Group Latin America, which is advising the bondholders group, and one of the authors of the report.
“There is a better way. Puerto Rico has a deficit problem, not a debt problem. The deficit is fixable,” he said on a media call.
While the report said Puerto Rico could avoid a broad-based restructuring, it also noted the island had about 18 different debt issuing entities all with different legal protection and financial capabilities. Each should be considered individually, the report said.
Among the more controversial issues at hand for Puerto Rico is whether any debt restructuring would involve its general obligation bonds. The report said GOs and commonwealth guaranteed debt had priority granted by Puerto Rico’s constitution.
Claudio Loser, another author of the report, warned of the negative ramifications of defaults and creditor fights, pointing to the capital flight from Argentina as well as the costs associated with Detroit’s bankruptcy.
He said the combination of fixing the deficit and addressing short-term liquidity with borrowing would support growth more than default.
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The authors said the commonwealth would find lenders after adopting a credible fiscal plan.
To further remedy the deficit, the report said the commonwealth could raise revenue by improving Puerto Rico’s tax compliance. The island collects only about 56 per cent of its potential tax revenue compared with an 83 per cent average for the 50 American states.
Bringing Puerto Rico in line with the US average could mean an additional $1.1bn without increasing tax rates, the report said.
On the spending side, the report outlines room for cuts, for example, in adjusting government expenses to the size of the commonwealth itself. Total governmental expenses have risen 29 per cent, or $4.4bn, in the past decade even as the population has declined 6 per cent.
Money could also be raised from measures including public-private partnerships, it said, a concept that already has precedent on the island with previous deals involving its airport and roadways.
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Pedestrians walk past an old hotel in the Condado area of San Juan, Puerto Rico, on Wednesday, July 8, 2015. A growing number of Republicans in the U.S. Congress are saying they want to support Puerto Rico as it wrestles with an escalating debt crisis, though they've stopped short of backing legislation allowing for municipal bankruptcy. Photographer: Christopher Gregory/Bloomberg



Puerto Rico bondholders present debt plan

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