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Puerto Rico Still Seen Defaulting On Debt Even With Rescue Law

Puerto Rico Still Seen Defaulting On Debt Even With Rescue Law

Investors in Puerto Rico‘s debt-burdened economy still face risks of default on some of the island’s $70 billion in debt even after the U.S. Congress on Wednesday created a powerful federal oversight board to manage credit restructurings.

U.S. President Barack Obama says he will quickly sign the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) before the U.S. territory faces a possible default on July 1 on $1.9 billion worth of debt payments.

While the government of Puerto Rico says it cannot honor all of its debts, and will likely default for a fourth time in the last year on some of its bonds, some creditors could get their payments via insurers or reserve funds.

“Regardless of the creation of the oversight board, the missed payments on July 1 will constitute defaults,” said Ted Hampton, senior credit officer at Moody’s Investors Service.

The July 1st payment includes roughly $780 million worth of General Obligation (GO) bonds, its most senior credit that is supposed to be paid out before all others.

“I expect they will not cover all of the GO payment. That would be their first GO default in all of this, which is one reason why many people involved at the U.S. Treasury, in Congress, in the government of Puerto Rico saw a lot of urgency in enacting PROMESA before July 1,” Hampton said.

According to Hampton, Puerto Rico has already missed approximately $562 million worth of debt payments through June 30th.

PROMESA provides the market with more clarity and lowers the chances of a chaotic legal fight by providing a stay, or halt, to any creditor litigation brought against the Puerto Rican government and its debt issuing agencies that is retroactive to December.

If the control board, appointed by Obama with Congressional input, can implement reforms, bring the island’s financial situation under control, and repay all of its debt, it will “enable Puerto Rico to be self-sufficient and able to sell bonds in the future for its operating and capital needs,” Dick Larkin, credit analysis director at Stoever Glass & Co.

PROMESA, a rare bi-partisan compromise, passed the Senate on Wednesday by a vote of 68 to 30. The House of Representatives passed it on June 9.

INSURERS ON THE HOOK

The risk of defaults is not eliminated by PROMESA, but the reduction of uncertainty is greatly welcomed after months of mostly dead-end talks between creditors and the government.

“The reality is that for all of the negative catalysts that lie ahead, credit markets and insurers are relieved that they now get to deal with adults, that is talk with a control board, rather than the governor and his staff,” said Height Securities analyst Daniel Hanson.

The stock prices for the three publicly traded monoline insurance companies with exposure to Puerto Rican debt rose as the likelihood of PROMESA passing increased on Wednesday.

Hundreds of millions of dollars of Puerto Rico‘s July 1 payments are covered by insurance, including about $364 million by Assured Guaranty, according to public records and a company spokeswoman. About $184 million of that covers GO debt. Assured has more than $5 billion in total Puerto Rico exposure. Its stock rose 3.56 percent to $24.67 per share.

MBIA’s National Public Finance Guarantee reported that about $350 million of its total $4.29 billion in Puerto Rico exposure comes due on July 1, including about $173 million in GO bonds. Its stock gained 4.28 percent to $6.81 per share.

Ambac, which insures more than $2 billion of Puerto Rican bonds, is on the hook for $122 million in principal and interest due on July 1, including some $40 million in GO or GO-guaranteed debt, according to the company’s public documents. Ambac shares climbed 5.10 percent to $15.84.

A spokesperson for Financial Guaranty Insurance Company (FGIC), which insures more than $1 billion in total Puerto Rican debt, could not be immediately reached on Wednesday.

Puerto Rico‘s benchmark 2035 General Obligation bond rose 1 full point in price ahead of the final vote, to trade at 66.75 points, pushing the yield down to 12.663 percent..

Moody’s rates this debt Caa3, which it believes implies creditors holding the bonds will have a recovery rate in a range of 65 to 80 percent of principal and interest.

“Dealing with PROMESA allows the insurers to trade some payments in the short-run for higher recoveries in the long-run. Ultimately that is a better business proposition for them than having to continue to limp along and never reach a deal,” said Hanson.

 

(Additional reporting by Nick Brown in New York, Susan Cornwell and David Morgan in Washington, and Karen Pierog in Chicago)

Photo: U.S. Treasury Secretary Jack Lew (L) and Puerto Rico’s Governor Alejandro Garcia Padilla (2nd R) listen to kindergarden teacher Gloria Rivera during their visit to the elementary school Eleonor Roosevelt in San Juan, Puerto Rico, May 9, 2016. REUTERS/Alvin Baez

House Panel Delivers Puerto Rico Crisis Bill, Debt Looms

House Panel Delivers Puerto Rico Crisis Bill, Debt Looms

U.S. lawmakers on Thursday began coalescing around revised bipartisan legislation to help address Puerto Rico’s unpayable debt burden that now threatens a full-blown humanitarian crisis.

Released close to midnight on Thursday, the House Natural Resources Committee’s revised bill includes a strong oversight board to direct how and when the island pays its bills and leaves many provisions of earlier proposals in place.

Puerto Rico has already defaulted on some of its roughly $70 billion in debt while trying to cope with a 45 percent poverty rate among its 3.5 million U.S. citizens.

The bill also keeps language that would allow Puerto Rico to cut repayments to creditors without their consent, known as a ‘cramdown.’

“Tonight, we introduced legislation to responsibly address the crisis in Puerto Rico. The revised bill incorporates technical refinements and input from all stakeholders. Any future changes will be done in public committee meetings,” HNRC Chairman Rob Bishop said in a statement.

While both Republican and Democratic leaders of the U.S. House of Representatives welcomed the bill after several delays, it remains to be seen what kind of welcome more conservative Republican lawmakers give the legislation.

In the early drafts of the bill, Senator Orin Hatch of Utah, the chairman of the powerful Senate Finance Committee, said he was not satisfied with the legislation, meaning a potential hurdle for passing the bill remains in place.

A vote by the U.S. House of Representatives on the bill is now expected to take place in the first week of June, ahead of a looming $1.9 billion debt payment due on July 1.

In recent months, the debt crisis has threatened a deepening humanitarian crisis as hospitals close wards, social services decline, and emigration saps more economic activity.

“After long bipartisan negotiations, we believe we have achieved a restructuring process that can work,” U.S. House Democratic Leader Nancy Pelosi said in a statement on Thursday.

House Speaker Paul Ryan, who faces opposition to the bill from within his own Republican ranks, highlighted the bipartisan effort as he will need Democrat votes to get it passed.

“Right now, the stability of the U.S. territory is in danger, as the Puerto Rican government continues to default on major loan payments. We have insisted that our response meet basic principles, and first among them is protecting taxpayers from a bailout,” Ryan said in a statement.

The bill, formally known as the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), seeks to return the island to solvency, rebuild a base for economic growth, and maintain its ability to access capital markets in the future.

Puerto Rico’s governor, Alejandro Garcia Padilla, said he was encouraged by the bill but chafed at the oversight board, which he believes undermine the island’s self-governance.

Choosing the members of the oversight board has been a sticking point in the talks leading up to the introduction of the bill.

“We will do our part to act expeditiously in providing President Obama with a list of qualified candidates for appointment to the oversight board,” Pelosi said.

U.S. Treasury Secretary Jack Lew said on Thursday he was pleased the bill includes “restructuring tools for Puerto Rico that are comprehensive and workable” but expressed disappointment that proposals to promote economic growth were left out of what he called a “tough bipartisan compromise.”

One conservative political lobby group affiliated with the Heritage Foundation panned the new legislation as not doing enough to address economic reforms.

“It also has failed to remain neutral in the tussle among creditors, designing a brand-new restructuring process instead of relying on negotiation and current law,” Dan Holler, a spokesman for Heritage Action said in a statement.

Puerto Rico’s creditors have lobbied Congress with different views and one main concern over the bill was whether or not it would create new precedents for treating investors, potentially setting up future legal fights in the U.S. mainland that are far away from the island’s current crisis.

“The bill, which creates a control board and allows for bankruptcy, is highly controversial and does not definitively protect any creditors. We believe the legislation is more positive for both GO and COFINA creditors than the legislation previously under review,” wrote Heights Securities analyst Daniel Hanson.

GO, or General Obligation bonds are backed by the full faith and credit of the island and are senior to all debt, while COFINA debt is backed by sales tax revenues.

“But the lack of clarity in the drafting of the bill, especially around conflicting portions within the bill and especially with respect to pension liabilities, means that we are still heart burned over the looming restructuring fight,” he said.

 

(Additional reporting by Nick Brown in San Juan, Richard Cowan and Tim Ahmann in Washington)

Photo: A protester holding a Puerto Rico’s flag takes part in a march to improve healthcare benefits in San Juan, Puerto Rico, November 5, 2015. REUTERS/Alvin Baez

U.S. Stocks Little Changed; Apple Up 0.2 Percent

U.S. Stocks Little Changed; Apple Up 0.2 Percent

New York (AFP) — Wall Street stocks were little changed in early trade Wednesday with Apple posting modest gains after unveiling a spate of new products, including a mobile-payment system and a smartwatch.

About 40 minutes into trade, the Dow Jones Industrial Average dipped 3.01 points (0.02 percent) to 17,010.86.

The broad-based S&P 500 shed 1.25 (0.06 percent) to 1,987.19, while the tech-rich Nasdaq Composite Index gained 0.89 (0.02 percent) to 4,553.18.

Patrick O’Hare, analyst at Briefing.com, said concerns about the Fed accelerating its plans to raise benchmark interest rates are the “excuse du jour” for tepid trade in equities.

But O’Hare also said the “stock market may just be succumbing to some price exhaustion after a huge move.”

O’Hare said the trajectory of Apple stock was consistent with the tech giant’s history of rising in the weeks before product launches and then cooling off after the announcements are made. Apple shares stood 0.2 percent higher.

Dollar General launched a hostile takeover campaign for Family Dollar, offering $80 a share for the company and seeking to scuttle a rival bid from Dollar Tree for $74.50. Family Dollar has said a deal with Dollar General would face major antitrust obstacles.

Dollar Tree lost 0.3 percent while Family Dollar and Dollar General each fell 0.1 percent.

EBay dropped 3.3 percent on worries that Apple’s new mobile wallet system could threaten its PayPal unit.

Although it is possible PayPal could be integrated into the Apple system, “competitive concerns for PayPal will likely continue” in light of the Apple news, said a note from Bank of America/Merrill Lynch.

Dow member Microsoft rose 0.1 percent following reports it is considering a $2 billion deal to buy Mojang AB, the creator of the popular “Minecraft” video game.

Bond prices fell. The yield on the 10-year U.S. Treasury advanced to 2.53 percent from 2.50 percent Tuesday, while the 30-year rose to 3.26 percent from 3.23 percent. Bond prices and yields move inversely.

AFP Photo/Eric Piermont

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