Holders of bonds issued by the Puerto Rican power utility PREPA, also known as AEE, the firm that controls energy production on the island, filed suit against the Puerto Rican government contending that the law regulating the process whereby public corporations may file for bankruptcy is unconstitutional.
"By promulgating this law," Puerto Rico, which is a U.S. commonwealth, "and the governor are intending to create legal means that violate the constitution and harm the plaintiffs and other creditors of public corporations," according to the lawsuit filed by entities that control $1.7 billion of PREPA's $8.8 billion debt.
The suit, brought in U.S. federal court in San Juan, says that the law signed by Gov. Alejandro Garcia Padilla is unconstitutional.
The law establishes a legal framework whereby public firms in financial difficulties may restructure their debts without having to resort to the Government Development Bank for Puerto Rico, or BGF.
The plaintiffs, 23 U.S. fund managers mainly belonging to Franklin Funds and Oppenheimer, say that the law, approved during the "fiscal emergency" decreed on the island, violates the 5th Amendment of the U.S. Constitution, which stipulates that private property may not be used for public ends without compensation.
They are also insisting that the U.S. Commonwealth of Puerto Rico may not approve a law that prevents potential plaintiffs from turning to the federal courts and say that the law violates federal bankruptcy legislation and regulates bankruptcy in a U.S. territory, something that only Congress may do.
The initial response to the lawsuit by credit rating agencies this past week was to reduce to "junk" status their evaluation of PREPA's bonds, along with those of the island's water and sewage authority and the highway and transportation authority. EFE
Puerto Rico has approved legislation allowing some public agencies to restructure their debt. Above, a vacant building in San Juan.Getty Images
A pair of Wall Street investment firms is challenging Puerto Rico's new law allowing some public agencies to restructure their debt, saying it violates the U.S. Constitution.
Funds managed by Franklin Templeton Investments and OppenheimerFunds Inc. asked the U.S. District Court for the District of Puerto Rico to block the law, arguing that only Congress is allowed to create bankruptcy rules. The funds hold about $1.7 billion combined in debt from the Puerto Rico Electric Power Authority, which they say they believe will seek to restructure its debt under the act "imminently."
"We believe it is our responsibility to stand up for the rights of bondholders and our shareholders when the unlawful acts of issuers or others threaten those rights," Oppenheimer said in a statement. Franklin Templeton declined further comment.
Puerto Rico lawmakers last week approved legislation allowing some agencies such as the island's power, water and transportation authorities to restructure their debt. Those agencies have a combined $19.4 billion in bonds outstanding, according to estimates from Barclays PLC. The law doesn't apply to Puerto Rico's general-obligation or sales-tax bonds, which are backed by the island's taxing authority.
The move alarmed investors, who took the law's passage to mean Puerto Rico plans to change the terms of its utilities' debt, leading to losses for bondholders. Bonds from the power authority tumbled after Gov. Alejandro Garcia Padilla announced the measure and some investors said they worried a restructuring could come as soon as this week.
Government officials have said no restructuring is imminent. The island's Government Development Bank said it stands behind the Public Corporations Debt Enforcement and Recovery Act and will defend it. Puerto Rico has a "sovereign's right to pass its own debt enforcement statutes in areas not covered by federal law," the bank said in a statement Sunday in response to the filing.
"The Recovery Act was designed to fill a gap in the existing federal insolvency regime and ensure the continuity of critical public services," the bank's statement said.
The act is a bankruptcy law and "treads on the Congress's exclusive province in enacting such legislation," the firms said in the court filing. Because it allows the power authority to seize the collateral securing its bonds, it also provides for an unconstitutional taking of property, the complaint said.
Puerto Rico has about $73 billion in total obligations, including that owed by its so-called public corporations, and has been struggling with high unemployment and a sluggish economy. Its debt is widely held by mutual funds and individuals, and some investors worry that troubles on the island could escalate into a wider Puerto Rican default and spook buyers in the broader $3.7 trillion municipal bond market.
The power authority has about $8.8 billion in debt outstanding, while the Highways & Transportation Authority has about $7 billion and the Aqueduct and Sewer Authority about $3.5 billion, according to a March report by Barclays. Those bonds are separate from the island's general obligation debt, and in more immediate trouble because the agencies behind them are heavily indebted and face mounting deficits and liquidity problems.
Bonds from some Puerto Rican agencies fell last week after the legislation was proposed and credit-rating firms downgraded the utilities. Fitch Ratings said "bondholders now face a probable financial restructuring or default" by the power authority. Bonds from that agency maturing in 20 years or longer fell 15% last week, while those coming due sooner fell as much as 40%, the filing said.
The Franklin funds collectively hold about $907 million in bonds issued by the power authority, while Oppenheimer Rochester Funds hold about $821 million, the complaint said.
SAN JUAN, Puerto Rico (AP) — The U.S. Department of Labor is pledging more than $6 million to help train people who have been laid off in the U.S. territory of Puerto Rico.
Resident Commissioner Pedro Pierluisi said Thursday that the training aims to help people find jobs in high-demand industries.
Only 41 percent of working-age Puerto Ricans are in the labor force, compared to 63 percent in the U.S.
The island of 3.67 million people also has a 13.8 percent unemployment rate, higher than any U.S. state.
A notable difference from other mainland jurisdictions is that Puerto Rico’s balanced budget requirement, while found in the constitution and relatively stringent in form, appears not to have been effective in constraining the growth of the Commonwealth’s debt,” said New York Fed chief, Dr. William Dudley in a speech to the Certified Public Accountants of Puerto Rico, in San Juan, on June 24.
Among the other notable differences, Dr. Dudley mentioned that the residents of Puerto Rico, unless U.S. government employees, weren’t required to pay personal income taxes. Another major difference between Puerto Rico and other states was the inclusion of public corporations among government entities, such as utilities like Puerto Rico Electric Power Authority (or PREPA), the Puerto Rico Highway and Transportation Authority (or PRHTA), and the Puerto Rico Aqueduct and Sewer Authority (or PRASA). The financials of these entities were included in the government’s balance sheet, unlike the prevailing norm in most states.
Impact of public corporations on Puerto Rico’s debt
Public corporations account for about 40% of the total outstanding debt of Puerto Rico. More importantly, ~85% of the increase in debt-gross national product (or GNP) ratio between 2000–2013, can be attributed to these corporations. The ratio of debt-GNP for Puerto Rico increased from about 60% in 2000, to over 100% in 2013, far exceeding any other state in the U.S. New York has the highest debt-GNP ratio among U.S. states at 29%—less than a third of the debt level in Puerto Rico.
In addition to the public debt, the island must also meet its unfunded pension liabilities, which are a contingent future claim and must necessarily be honored. According to Dr. Dudley, there were three key factors determining the debt burden—the government’s fiscal policy, the growth rate of the economy, and the interest rate on the public debt.
In the following section, we’ll discuss the investor impact of some of these policies, comparing returns on exchange-traded funds (or ETFs) like the Market Vectors High-Yield Municipal Index ETF (HYD), the SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB), and the iShares National AMT-Free Muni Bond ETF (MUB) with returns for the SPDR S&P 500 ETF (SPY) and the Vanguard Total Bond Market ETF (BND). Please continue reading the next sections in this series.
“The recent downgrading of Puerto Rico’s public debt to non-investment grade was a clear signal that the current fiscal situation poses serious risks to the island’s economic future,” said Dr. William Dudley. Dr Dudley is the New York Fed chief. In a speech to the Certified Public Accountants of Puerto Rico, in San Juan, on June 24, Dr. Dudley discussed the economic and fiscal issues facing Puerto Rico’s economy and the initiatives that could be taken to improve the island’s situation. He has also commissioned a new report to analyze Puerto Rico’s economy. It’s an update on the report published by the New York Fed in 2012.
Puerto Rico has been in the spotlight recently due to the downgrade of its debt to junk status in February, 2014, by all three major credit ratings agencies (Standard & Poor’s, Moody’s, and Fitch). Municipal debt (PZA) issued by the island is free from state, local, and federal taxes. Due to this triple advantage, a significant number of individuals, institutional investors, and municipal bond ETFs (MUB) were holding debt issued by the Commonwealth of Puerto Rico, estimated at about $70 billion. A debt default by Puerto Rico would have repercussions on the $3.7 billion municipal bond market.
Total municipal debt outstanding was estimated at about $3.7 billion at the end of 1Q14, making up about 9% of the total outstanding debt in the U.S. Individual investors held most of the total outstanding municipal debt at about 44% of the total. Banking institutions like some of the firms included in the SPDR Financial Select Sector ETF (XLF) held about 12.4% of the total municipal debt outstanding.
Recent events in Puerto Rico affect the municipal bond market
Unlike most states in mainland U.S., the financials of public corporations (for example—utility companies) are included in the government’s balance sheet. These corporations have issued significant amounts of debt in recent years. The government of Puerto Rico has recently announced plans to undertake the restructuring of the debt burden of some public corporations—a step that may be needed to solve the island’s fiscal and economic issues.
In this series, we’ll discuss the key elements of Dr. Dudley’s speech on the situation in Puerto Rico. We’ll also discuss why municipal debt has outperformed returns on other asset classes, like stocks (IVV) and other forms of investment-grade debt (BND) and Treasuries (TLT).
About Dr. William Dudley
Dr. William Dudley took over as the tenth head of the New York Fed in January, 2009. Prior to his appointment, he was Executive Vice-President of the Markets Group at the New York Fed, which manages the System Open Market Account (or SOMA). As head of the New York Fed, he is also Vice-Chairman and a permanent member of the Federal Open Market Committee (or FOMC), which formulates U.S. monetary policy. Dr. Dudley is Vice-Chairman of the Economic Club of New York. He has also been the Chairman of the Committee on the Global Financial System of the Bank for International Settlements since 2012. A former partner and Managing Director at investment management firm Goldman Sachs, Dr. Dudley has a doctorate from the University of California at Berkeley.
The purview of the New York Fed extends over the Second Federal Reserve District. The district includes the State of New York, the 12 northern counties of New Jersey, Fairfield County in Connecticut, Puerto Rico, and the U.S. Virgin Islands. The New York Fed is the largest of the 12 Federal Reserve Banks (or FRBs) in terms of assets and volume of activity. Besides the normal functions common to all the FRBs of the 12 districts, the New York Fed also has some unique responsibilities, including conducting open market operations on behalf of the U.S. Federal Reserve, intervening in foreign exchange markets, and storing monetary gold for foreign central banks (Source: New York Fed).
In the next section, we’ll cover aspects of Dr. Dudley’s speech that discussed the key issues facing Puerto Rico’s economy.
NEW YORK, Jun 27, 2014 (BUSINESS WIRE) -- Fitch Ratings downgrades the following AES Puerto Rico (PR) L.P obligations to 'CC' due to the downgrade to 'CC' of the project's offtaker, the Puerto Rico Electric Power Authority (PREPA):
--$161.87 million 6.625% Cogeneration facility revenue bonds, series A (tax-exempt bonds) due June 1, 2026; and
--$33.1 million 9.12% Cogeneration facility revenue bonds, series B (taxable bonds) due June 1, 2022.
Fitch also maintains the bonds on Rating Watch Negative.
In the event of a default or debt restructuring on behalf of PREPA, Fitch will review the impact to AES PR and determine the appropriate rating action.
For more commentary on Fitch's Public Power rating action on PREPA, please see 'Fitch Downgrades Puerto Rico Electric Power Auth's Rev Bds; Maintains Watch Negative' (dated June 26, 2014) available on Fitch's website at ' www.fitchratings.com '.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
SOURCE: Fitch Ratings
Fitch Ratings Primary Analyst John Kennedy, +1-212-612-7853 begin_of_the_skype_highlighting+1-212-612-7853 FREE end_of_the_skype_highlighting Director Fitch Ratings, Inc. 33 Whitehall St New York, NY 10004 or Secondary Analyst Andy Joynt, +1-415-732-5562 begin_of_the_skype_highlighting+1-415-732-5562 FREE end_of_the_skype_highlighting Associate Director or Committee Chairperson Greg Remec, +1-312-606-2339 begin_of_the_skype_highlighting+1-312-606-2339 FREE end_of_the_skype_highlighting Senior Director or Media Relations, New York Elizabeth Fogerty, +1-212-908-0526 begin_of_the_skype_highlighting+1-212-908-0526 FREE end_of_the_skype_highlighting elizabeth.fogerty@fitchratings.com
It’s 2 a.m. at La Factoria in Puerto Rico’s Old San Juan, a hipster joint with a sagging couch, tile floors and Christmas lights that wouldn’t be out of place in Brooklyn’s Williamsburg. While “Get Lucky” plays, tipsy couples slink out the doors onto the colonial city’s cobblestone streets into this warm April night.
At the bar, a 28-year-old hedge fund trader -- the type of person who posts his SAT results on his LinkedIn page -- is ranting about the tax code. He’s obsessed with it, complaining that the U.S. is the only major country taxing citizens on their worldwide income, no matter where they reside. That’s why he moved here.
Struggling to emerge from an almost decade-long economic slump, the Puerto Rican government signed a law in early 2012 that creates a tax haven for U.S. citizens. If they live on the island for at least 183 days a year, they pay minimal or no taxes, and unlike Singapore or Bermuda, Americans don’t have to turn in their passports. About 200 traders, private-equity moguls and entrepreneurs have already moved or committed to moving, according to Puerto Rico’s Department of Economic Development and Commerce, and billionaire John Paulson is spearheading a drive to entice others to join them.
Protesters Marching
Puerto Rico’s low-tax welcome mat comes as some of the wealthiest Americans grow more anxious about tax increases and rhetoric directed at the rich. Tax bills have risen after a 10- year break under President George W. Bush that disproportionately favored the rich. The 2008 global financial crisis and the recession that followed also unleashed movements such as Occupy Wall Street that focused attention on growing inequality and the responsibility of large financial institutions in helping to create the mess.
In October 2011, protesters marched by the homes of Manhattan’s billionaires, including Paulson’s. A little more than a year later, President Barack Obama beat Mitt Romney in an election that highlighted the latter’s wealth and private-equity background.
“I’m worried about the shifting mentality among the electorate, people blaming problems on the rich, on business and on capitalism,” says Peter Schiff, a onetime candidate for the U.S. Senate from Connecticut and a former economic adviser to libertarian presidential hopeful Ron Paul. “I’m afraid that the tax rates that are already high will get higher in the years ahead,” maybe up to 60 percent or 70 percent, he adds.
New Rules
Schiff, who runs Westport, Connecticut-based brokerage Euro Pacific Capital Inc., relocated his $900 million asset management arm from Newport Beach, California, to San Juan in 2013. He plans to move to the island within the next several years. For now, a son from a first marriage is keeping him in Connecticut.
Under Puerto Rico’s new rules, an individual who moves to the island pays no local or federal capital-gains tax -- capital gains are charged based on your tax home rather than where you earn them -- and no local taxes on dividend or interest income for 20 years. Even someone working for a mainland company who is a resident of the island would be exempt from paying U.S. federal taxes on his salary.
Moving to the island won’t kill all taxes: U.S. citizens still have to pay federal taxes on dividend or interest income from stateside companies. But the savings can be extraordinary, especially given the effects of compounding, says Alex Daley, chief technology investment strategist at Casey Research, a firm that publishes reports for investors. Late last year, Daley moved from Stowe, Vermont, to Palmas del Mar, about 45 minutes from San Juan.
Tax Savings
Say you put $100,000 in a 5 percent certificate of deposit that compounds annually and reinvest the proceeds every year. If you lived in Puerto Rico, you’d earn $165,000 in interest over two decades, Daley calculates. If you lived in California, your state and federal taxes could reduce that to as little as $64,000.
Paulson, who made $15 billion for himself and his investors betting against U.S. mortgages during the financial crisis, helped start the wave of transplants last year, when he considered moving to the island. Paulson, 58, cited excessive media attention as his reason for staying put in the States. The press reports had an unintended consequence, though: Word quickly spread to other wealthy individuals that Puerto Rico wanted them.
Educating Expats
Like the tax refugee at La Factoria, who asked that I not divulge his identity because his boss wouldn’t want to see his name in print, almost all say the incentive to move to a cash- strapped Caribbean island plagued by violent crime is simple: Pay Uncle Sam less.
Robb Rill, 43, managing director of private-equity firm Strategic Group PR, relocated with his wife to Puerto Rico from Florida in February 2013. He started the 20/22 Act Society, named for the tax laws designed to encourage people and businesses to set up shop here, to help educate fellow expatriates and serve as a networking group.
“I’m talking to people every day who are moving here, and their No. 1 motivation is taxes,” he says.
Margaret Peña Juvelier, who grew up in New York City, the daughter of Puerto Rican immigrants, moved to San Juan in 2012 to open a Sotheby’s real estate office. Driving around, she shows me a few of San Juan’s top apartments. We cross a small bridge to a six-block area surrounded by water.
“This is Waco,” Juvelier says, pointing out the window.
“Sorry?” I ask, thinking of the Branch Davidians.
Relatively Cheap
“WeCo -- West Condado,” Juvelier says, pointing out the window and explaining that she and her daughter, also a Sotheby’s broker, have decided to give some of the neighborhoods catchy names, such as New York’s SoHo and Tribeca.
By New York standards, prices are cheap: A 3,800-square- foot penthouse with water views from every room is listed for $1.99 million; and a four-bedroom duplex with two terraces in the city’s financial district is on sale for $900,000. Yet the housing isn’t enough to lure potential converts.
The real challenge, she says, is convincing people they can replicate their life. Will they have well-traveled, well- educated friends? Are there decent schools for their kids? Are there charities that wives can join? Is crime an issue? She takes her clients to dinner at outdoor cafes to show them it’s safe at night, and she organizes luncheons to introduce newcomers to native Puerto Ricans.
In late April, Puerto Rican officials helped set up a conference in San Juan to educate potential residents about the new laws and tell the world that Puerto Rico is a fine place to live -- at least if you’ve got dough.
Beaches, Restaurants
The conference was the brainchild of Alberto Bacó Bagué, secretary of economic development and commerce, and Paulson, who the territory’s government says plans to invest about $1 billion in real estate this year and next. Two hundred people showed up for panels, tours and information sessions with private schools, real estate brokers and a tax expert.
The message from every speaker was the same: Puerto Rico isn’t just about low taxes. It has white-sand beaches and temperatures in the 80s year-round. There’s an art museum with a world-renowned pre-Raphaelite collection. It has luxury apartment buildings, over-the-top resorts such as Dorado Beach, and a handful of private international schools that send their graduates to Ivy League colleges. It has restaurants with award- winning chefs. It’s a four-hour flight to New York. And the island operates under U.S. law.
Paulson Plan
Paulson is betting that millionaires will come in droves. In his presentation, in which he forecast that Puerto Rico would become “the Singapore of the Caribbean,” he said he plans to develop residential and office properties to go beyond the current high-end offerings.
The government gives a tax break for businesses that move to Puerto Rico and provide services outside the country, perfect for a hedge fund with clients in New York and London. These firms pay only a 4 percent corporate tax, compared with 35 percent on the mainland. About 270 companies have applied for this incentive, according to officials.
Governor Alejandro García Padilla, elected in November 2012 by a margin of 11,000 votes -- he likes to joke that he should have asked for a recount -- is promoting the laws in the hope they will help spur an economy that’s barely seen any growth since 2007. The statistics are grim. The territory of 3.7 million people has $73 billion of debt and a median income of $19,429, about half that of Mississippi, the poorest state in the union. Unemployment is 13.8 percent, compared with 6.3 percent stateside; and income inequality, as measured by the Gini index, is higher than in any of the 50 states.
Island Exodus
Padilla proposed legislation enabling debt restructuring of some public corporations. It would allow them to negotiate with bondholders to reduce their debt loads.
Puerto Ricans were given U.S. citizenship in 1917, meaning they can easily leave the island for better jobs stateside. And they have. A net 280,000 engineers, doctors and other citizens emigrated from 2005 to 2012, according to the Puerto Rico Institute of Statistics. The government is hoping the campaign to lure the rich from the mainland will bring more jobs to the island and raise GDP.
“Our plan is not just about keeping government spending in line, but it is about generating wealth in Puerto Rico -- jobs, investment and trade,” García Padilla said at the April conference. The government estimates that the two tax laws could create 90,000 jobs and add $7 billion to the economy by 2016.
Worst Aspects
One hedge-fund manager, who requested I not use his name, gave a less-than-rosy view as he drove around the narrow streets of Santurce in San Juan. He’d moved from New York a few months ago, and although he likes living in San Juan, he calls it a bombed-out version of Miami.
In many respects, he says, Puerto Rico is the worst of the mainland and the Caribbean. There are more Walmarts and Walgreens per square mile than in any other place in the U.S., according to the Puerto Rico Center for Investigative Journalism, and it has the inefficiencies of most Caribbean islands, including power outages and quirky laws. Married couples must buy property together unless they have a prenuptial agreement. He complains that it takes 20 minutes to get a Quiznos sandwich. Service is often on “island time.”
The hedge fund manager brings me to Santaella restaurant, where we join a table of 10 or so newcomers eating the island’s comida criolla and drinking cocktails and beer. No one wants to speak on the record. They aren’t much different from any group of young traders -- cracking jokes and checking out women at the bar -- except for their obsession for minimizing taxes.
Downplaying Problems
One considered giving up his citizenship to move to Singapore, where the government has also lured hedge funds with low taxes. Another trader, who hasn’t been in town long enough to acquire a decent tan, says that from a tax perspective he was embarrassed to have lived in New York City, where the marginal rate for affluent New Yorkers can exceed 50 percent on ordinary income.
Most of the new arrivals downplay Puerto Rico’s fiscal problems, which include runaway pension obligations and an underground economy that leads to low tax collection rates. They’re also convinced their 20-year contracts with the government guaranteeing the tax benefits are sacrosanct. They will survive the inevitable Internal Revenue Service audits, they say, as long as they follow the residency rules.
‘Deal Killer’
But there may also be financial drawbacks to moving to the island. Brad Alford, who runs Atlanta-based Alpha Capital Management LLC, which farms out more than $200 million to alternative mutual funds, was all set to invest $10 million with portfolio manager Randy Swan until he learned that Swan was moving to Puerto Rico to cut his tax bill.
“I told Swan’s sales guy that was a deal killer,” Alford says. “It’s morally wrong and un-American not to pay your fair share of taxes.”
Swan says taxes were only one of the reasons he moved and that he’s received no complaints from any current or potential clients.
Not every émigré from the states is motivated solely by tax savings. One of the wealthiest recent arrivals is Toby Neugebauer, co-founder of Quantum Energy Partners, a Houston private-equity firm that oversees more than $7 billion. He’s opening a family office and recently bought a house at Dorado Beach, where he lives with his wife and two teenage sons. The Ritz-Carlton resort there boasts rooms that start at $800 a night and a plantation house where Amelia Earhart stayed that goes for $30,000 a day.
Cool Adventure
Neugebauer, who arrived in March, cited the chance for his sons to learn Spanish and attend a top school, along with better-priced investment opportunities than in Texas as his main incentives.
“I wouldn’t have moved for the taxes, but it is an interesting proposition,” he says.
John Helmers, a money manager who spent time at Citadel LLC and Tudor Investment Corp., says he would never have moved from Greenville, South Carolina to San Juan with his wife, Glenn, and three of his five children, if they hadn’t all been on board.
“When my wife said this could be a cool adventure for the family, that was the go switch,” he says. Helmers is setting up Long Focus Capital Management LLC, a firm focused on macro investing. “Before I spent 30 percent of my time thinking about taxes, and now I don’t have to do that.”
Real Difference
Yet Helmers, a fit 49-year-old with close-cropped hair and a slight Southern drawl, is now spending time thinking about Puerto Rico’s poor. He’s interested in following the lead of his former boss, Paul Tudor Jones, who created the Robin Hood Foundation to fight poverty in New York City. Helmers’s wife is involved with the Foundation for Puerto Rico, an organization focused on economic development.
“You don’t have the same support network here as you have in the greater New York area,” Helmers says. “There’s an opportunity to make a real difference.” Yet not all the new residents have the same reflex to give back, he says. “It’s our job to get the opportunists over to our side.”
The biggest question is whether Puerto Rico’s plan will improve its economy.
“This place is in dire straits,” says Rill of Strategic Group PR. He calls the tax laws a glimmer of hope for the island. “We’re buying cars and getting office space and contributing to the economy.”
He spent about $1 million, on top of his house purchase to relocate, he says.
‘Slightly Disturbing’
“It’s a slightly disturbing way to pursue economic development,” says Kim Rueben, a senior fellow at the Urban Institute in Washington, who has spent 10 years studying policy and spending by state and local governments. “There can be a multiplier effect, but you are dealing with one of the lowest-income populations in the U.S. on a per-capita basis. How much does it really help to import billionaires?”
Denver Dale, who runs private-equity firm On-Point Capital in Monterey, California, ponders the same question in April as he sips a drink at a preconference cocktail party held at the Condado Vanderbilt Hotel, one of Paulson’s recent acquisitions.
Dale, a Goldman Sachs Group Inc. alum, says he and his wife, a gynecologist, are seriously considering relocating, calling it a no-brainer as long as he could ensure that his business would be eligible for the island’s tax breaks. He wasn’t so sure whether it was a no-brainer for Puerto Ricans: “We’ll know in five years if you end up with a couple of areas of haves amid a whole bunch of have-nots.”
Puerto Ricopublic corporation debtslumped on Friday after a new law that allows agencies to restructuretheir debts sparked fears of an imminent default and led to a slew ofdowngrades on the electricity, highway and water authorities.
Debt of the Puerto Rico Electric Power Authority (PREPA) maturing in2040 and carrying a coupon of 5.25 percent traded with an average priceof 45.956 cents on the dollar and an average yield of 12.139 percent,according to Thomson Reuters data.
On Friday afternoon, PREPA's executive president, Alberto Lazaro, said the agency does not foresee restructuring its debt.
"It is our understanding that in PRASA there does not exist any condition that would lead us to think about restructuring our debt. We don't have the need to use the tools provided by the Recovery Act,'' Lazaro said in a statement.
(Reuters) - Puerto Rico Aqueduct & Sewer Authority (PRASA) does not foresee restructuring its debt, the agency's executive president Alberto Lazaro said on Friday after a Moody's downgrade that cited a new local law allowing public corporations to restructure.
"It is our understanding that in PRASA there does not exist any condition that would lead us to think about restructuring our debt. We don't have the need to use the tools provided by the Recovery Act," Lazaro said in a statement. (Reporting by Edward Krudy; Editing by James Dalgleish)
SAN JUAN, Puerto Rico (AP) — Two more of Puerto Rico's largest public corporations were hit with credit downgrades Friday as the U.S. territory's governor prepares to sign a bill that would allow them to restructure their debt if needed.
Moody's Investors Service lowered its ratings on the water and sewercompany and the highway and transportation authority, pushing them deeper into junk territory.
The announcement came after Moody's, Standard & Poor's and Fitch Ratings all downgraded Puerto Rico's state-owned power company and put its debt in junk status. The Electric Energy Authority has some $671 million in debt that matures in July and August, leading to speculation it might seek to restructure its debt.
All the ratings are on watch for possible further downgrades as Puerto Rico's government aims to appease investors while trying to reduce $73 billion in public debt and pull the island out of a nearly 10-year economic slump. Public corporations account for nearly 40 percent of the island's debt.
"The governor's proposal of a public corporation liability law earlier this week signals a rising risk that the commonwealth ... is contemplating a strategic restructuring of its public corporation debt," Moody's said in a statement.
Gov. Alejandro Garcia Padilla introduced the measure Wednesday to allow certain public corporations to work with creditors to reach an agreement within nine months. If none was reached, the case would go to court.
Legislators have already approved it, and Garcia said Friday he would sign the bill soon. "Public corporations have to be self-sufficient. End of story," he told the annual convention of the Puerto Rico Chamber of Commerce.
Government officials have said Garcia's measure is not intended to allow public agencies to file for bankruptcy or seek liquidation. They add that it does not apply to the government's general obligation debt or to the island's 78 municipalities, the Government Development Bank or other entities.
Alberto Lazaro, executive president of Puerto Rico's water and sewer company, said that agency is not planning to restructure its debt. "We are not facing liquidity issues," he said.
Javier Ramos, executive director of the highway and transportation authority, said he already imposed strict spending measures and is seeking other ways to overcome the agency's financial crisis.
Garcia also is expected to sign the territory's new budget even as some legislators warn that a $200 million budget gap has not been resolved. Both the island's Senate and House of Representatives have approved a $9.6 billion budget but are expected to meet again to resolve the issue.
Puerto Rico may see its credit rating, already in the speculative range, lowered even more because of legislation to allow some public corporations to restructure their debt, Standard & Poor’s said.
The company said it put the commonwealth’s general-obligation bond rating on CreditWatch with negative implications, meaning it could be lowered within 60 to 90 days if Governor Alejandro Garcia Padilla signs the bill into law.
The proposal, sought by Padilla and passed by lawmakers June 25, would allow public utilities such as Puerto Rico Electric Power Authority to negotiate with bondholders to reduce their debt loads. Prepa, struggling with $10 billion of debt, is seeking to extend lines of credit with banks and could be one of the first borrowers to rely on the plan.
Padilla’s proposal “is indicative of the growing economic and fiscal challenges for the commonwealth as a whole, which could lead to additional liquidity pressures,” S&P analyst David Hitchcock said in a statement.
The legislation may also signal “a potential shift in the commonwealth’s historically strong willingness to continue to meet its obligations to bondholders,” Hitchcock said in a report. The legislation excludes general-obligation bonds.
S&P, along with Moody’s Investors Service and Fitch Ratings, cut the commonwealth’s general-obligation bonds to speculative grade beginning in February and followed with similar downgrades to its utilities.
Investors have been anticipating a potential debt restructuring since August on concern that the island of 3.6 million people would be unable to repay its obligations. Its unemployment rate of 13.8 percent is more than double the U.S. average.
To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; Michelle Kaske in New York at mkaske@bloomberg.net
To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Pete Young, Sylvia Wier
Puerto Rico isn’t looking only to wealthy, tax-averse Americans for growth—tourism is also high on the list of ideas for boosting the economy. The U.S. territory wants to boost tourism’s share of gross domestic product to 8 percent from 6 percent over the next three years, an increase of $1.2 billion. Parts of the plan include adding more than 5,000 new hotel rooms by 2017, luring new flights, and developing two new ports for cruise lines to visit.
“If you want quick impact to the economy, tourism is where it’s at,” said Ingrid Rivera, executive director of Puerto Rico Tourism, the island’s official tourist agency. “We are small but we are potent.”
The U.S. territory of 3.7 million people has struggled with meager economic growth and an unemployment rate of about 14 percent, higher than in any U.S. state. Puerto Rico is burdened by more than $70 billion in debt and its credit ratings are at junk level. In the travel industry, Puerto Rico’s all-inclusive resorts also labor under the reputation of being more expensive than those at some other destinations, particularly the Dominican Republic, which has seen explosive growth in that part of the industry. Currently, about 90 percent of tourists are from the U.S. Northeast and the many cities there with large Puerto Rican communities.
Puerto Rican tourism officials aim to capitalize on its abundance of tropical allures: warm weather, gorgeous beaches, and diverse geography, including El Yunque National Forest, the only tropical rain forest in a U.S. park. Several luxury hotels, including a new Four Seasons property near Fajardo on the east coast, are also being developed. High-end hotels also typically employ more people.
To get more visitors, Puerto Rico needs more airline service, Rivera said, and has set a goal of 10 million annual passengers, up from 8.4 million today. The island has twice-weekly flights from Madrid and a weekly flight from Frankfurt, as well as several weekly flights from Panama and Colombia. But there’s no direct service from Mexico or the United Kingdom, two places Rivera said would send large numbers of travelers to Puerto Rico. JetBlue Airways (JBLU) is slowly building a new regional operation from San Juan, hoping to mine some of the profitable Caribbean routes American Eagle flew before American Airlines (AAL) dismantled its hub there. In recent years, American carried almost one-third of traffic at San Juan.
Puerto Rico is also working to rebuild annual cruise ship visitors back to 1.5 million. That figure plunged by nearly one-third after the 2008 financial crisis damaged the tourism industry worldwide. Rivera said Ponce, on the southern shore, and Mayaguez, on the west coast, both plan to develop infrastructure to support large cruise ship calls. “The attractions are there,” Rivera said on Thursday during a visit to Bloomberg’s New York headquarters.
The top opportunity for attracting new visitors, however, isn’t among adventure-minded British and German backpackers, or big-spending Brazilian shoppers. It’s in the U.S., farther west, Rivera said, counting the places with large groups of people unfamiliar with Puerto Rico: Chicago, Houston, Dallas, California, and myriad other locales. “You don’t need a passport,” she said.
Yields on Puerto Rico electric bonds soared to record highs as Governor Alejandro Garcia Padilla yesterday pushed legislation enabling debt restructuring of some public corporations.
Puerto Rico Electric Power Authority securities maturing July 2017 traded at an unprecedented average yield of 20.6 percent, equivalent to 66.4 cents on the dollar and up from 12 percent when they last changed hands in April, according to data compiled by Bloomberg. Prepa, struggling with $10 billion of debt, is seeking to extend lines of credit with banks and could be one of the first borrowers to rely on the plan.
The proposal, which the legislature approved last night and that now heads to the governor for his signature, would allow public utilities such as Prepa and the Puerto Rico Aqueduct and Sewer Authority to negotiate with bondholders to reduce their debt loads. While the bill excludes general-obligation bonds and debt backed by sales-tax revenue, those securities may also face restructuring if Puerto Rico’s economy fails to improve, said Shawn O’Leary of Nuveen Asset Management, which oversees $92 billion of munis.
“If you’ve been bullish on Puerto Rico up to this point, part of your thesis has been that they have a strong willingness to pay their debt,” O’Leary, a senior research analyst in Chicago, said in a telephone interview. “Clearly today’s legislation proves otherwise.”
Struggling Economy
Debt sold in Puerto Rico lost 0.37 percent yesterday, compared with a 0.15 percent gain for the broader muni market, according to S&P Dow Jones Indices.
Puerto Rico, with an economy that’s struggled to grow for eight years, and its agencies owe $73 billion of debt, with about 66 percent of U.S. muni mutual funds holding the securities, according to Morningstar Inc. The debt is so widely held because it’s tax-exempt nationwide.
The three largest ratings companies cut the commonwealth’s general-obligation bonds to speculative grade beginning in February and followed with similar downgrades to its utilities.
Investors have been anticipating a potential debt restructuring since August on concern that the island of 3.6 million would be unable to repay its obligations. Its unemployment rate of 13.8 percent is more than double the U.S. average.
‘Desperation Move’
While Garcia Padilla has said his administration will pay off its $10 billion of general obligations on time and in full, O’Leary said investors should be wary that the scope of a restructuring may extend beyond the public corporations because of the depths of the island’s economic challenges.
“This is a desperation move,” O’Leary said. “What it signals is that when they get into trouble, they may not honor all their obligations.”
David Chafey, chairman of the Government Development Bank, which works on the commonwealth’s debt sales, declined to say during a conference call with reporters which government entity most needs to change its debt structure.
The bill allows public corporations to negotiate with investors for a period of nine months once 50 percent of bondholders agree to begin discussions about debt changes, Treasury Secretary Melba Acosta said during the call. Any restructuring would require approval of 75 percent of bondholders, she said.
Prasa’s Debt
If the parties fail to reach an agreement within that timeframe, a Puerto Rico court would then oversee the process, Acosta said.
The legislation allows public entities that are in financial stress to continue providing core services to Puerto Rico residents while addressing debt loads, Chafey said.
“It provides a clear legislative framework for certain public corporations that are experiencing severe financial stress to work on their financial obstacles so they may continue providing essential services ensuring the health, safety and welfare of Puerto Rico,” Chafey said.
Prasa, the water and sewer agency, has about $4.5 billion of debt and Puerto Rico Highways & Transportation Authority has $7 billion, Chafey said.
Garcia Padilla, who took office in January 2013, has been pushing for Prepa and other public agencies to become self-sufficient and not rely on the commonwealth’s operating budget, which has struggled with deficits for years.
‘Ring Fence’
Even if Puerto Rico’s public corporations reduce their debt levels and operate without subsidies from the government, the commonwealth and its agencies still face the challenge that the island’s economy needs to grow substantially to help alleviate its fiscal stresses, said Joseph Rosenblum, director of municipal credit research in New York at AllianceBernstein LP, which manages about $30 billion of munis.
“Even though they’re trying to sort of ring-fence these public corporations, there is still overlapping relationships,” Rosenblum said in a telephone interview.
The exclusion of general obligations and sales-tax debt from the measure “affirms the relative strengths of those credits and the market’s acting accordingly,” said Chad Farrington, head of municipal research in Boston at Columbia Management Investment Advisors, which oversees $30 billion of munis.
Puerto Rico general obligations sold in March and maturing July 2035 traded at 10:40 a.m. in New York at an average price of 92.5 cents on the dollar, up from 86.4 cents on June 24, the day before the governor filed his bill, Bloomberg data show.
Gains in Puerto Rico’s general obligations may not last considering the governor’s bill would force investors to accept lower payments as part of their contribution to the island’s recovery, John Miller, co-head of fixed income at Nuveen, said in a telephone interview.
“They have financial problems and they’re saying bondholders are going to be part of the solution--not getting paid in full,” Miller said.
To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net
To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Alan Goldstein, Mark Schoifet
SAN JUAN, June 25 (Reuters) - Puerto Rico's governor filed legislation on Wednesday to authorize a bond issue of up to $60 million.
According to Senate Bill 1165, the bonds would be used to cover the cost of necessary public works projects and of the costs of issuing the bonds. The projects should have a useful life of at least five years.
The timing of the sale depends on market conditions, and the legislation specifically forbids using proceeds to cover operational costs. The legislature, which has to approve the bill, ends its current session in five days.
The legislation authorizes the Government Development Bank - the territory's bank, financial adviser and fiscal agent - to provide loans for financing projects that would be repaid with the bond proceeds.
It would also allow Puerto Rico's Treasury Department to make temporary payments from the general fund for the public improvements through the issuance of Bond Anticipation Notes.
Governor Alejandro Garcia Padilla on Wednesday also unveiled a plan for public corporations managing the territory's infrastructure to restructure their debts. The bill is expected to pass the legislature quickly.
His administration and the Government Development Bank both said the authorities would continue providing services and completing renovations during any restructuring.
The island last came to market in March with $3.5 billion in bonds, the largest junk sale ever in the U.S. municipal bond market. Those bonds offered 8 percent coupons and have fetched yields topping 9 percent in secondary trading.
(Reporting by Reuters in San Juan; Writing by Lisa Lambert in Washington; Editing by Jonathan Oatis)
Puerto Rico Governor Alejandro Garcia Padilla proposed legislation that would let certain public corporations restructure debt.
The measure excludes changes to general-obligation bonds and debt backed by sales-tax revenue, according to an e-mailed statement. Public utilities such as the Puerto Rico Electric Power Authority and the Puerto Rico Aqueduct and Sewer Authority would be able to negotiate with bondholders to change their debt loads. The commonwealth and its agencies have $73 billion of debt.
“The Recovery Act is created to provide a clear legislative framework that allows public corporations to address their financial difficulties without compromising any essential services provided by these corporations,” David Chafey, chairman of the Government Development Bank, which works on the commonwealth’s debt sales, said in the statement.
Investors have been anticipating a potential debt restructuring since August, with the island’s economy struggling to grow for eight years and an unemployment rate of 13.8 percent that’s more than double the U.S. average. Puerto Rico’s challenges affect the $3.7 trillion municipal-bond market because about 66 percent of U.S. mutual funds that focus on state and local debt hold the securities, according to Morningstar Inc.
Photographer: Ricardo Arduengo/AP Photo
Puerto Rico Governor Alejandro Garcia Padilla speaks during the state of the commonwealth address in San Juan, Puerto Rico, on April 25, 2013. Close
Puerto Rico Governor Alejandro Garcia Padilla speaks during the state of the... Read More
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Photographer: Ricardo Arduengo/AP Photo Puerto Rico Governor Alejandro Garcia Padilla speaks during the state of the commonwealth address in San Juan, Puerto Rico, on April 25, 2013.
“If you had reviewed the financials of these public corporations, you would have seen that there’s great stress,” said Robert Amodeo, head of munis in New York for Western Asset Management Co., which oversees about $30 billion of state and local debt.
Yields on Prepa bonds surged. Agency debt that matures in July 2017 rose to an average yield of 22 percent, a record high and up from 12 percent when it last changed hands in April, according to data compiled by Bloomberg. That’s equivalent to about 64.7 cents on the dollar.
(A previous version of this story gave an incorrect title for David Chafey.)
To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net
To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Alan Goldstein
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