The commonwealth of Puerto Rico and the Puerto Rico Electric Power Authority may take four to six years to restore liquidity and marketability for their debt, municipal experts told The Bond Buyer.
In written responses to a Bond Buyer survey, six muni pros said the Puerto Rico debtors will regain market confidence only through restructuring, legislative and policy change, budgetary improvements, tax reform, and other cost-cutting and revenue-generating measures.
The Bond Buyer asked: Will the commonwealth and PREPA be able to establish a steady and sustainable path to fiscal relief by the end of July, or will these entities be in worse shape in three months’ time than they are now? When will a turnaround come and what steps will be required? And will there be an opportunity for long-term investment in these entities going forward?
“Puerto Rico on the Brink” (editorial, April 30) observes that the United States territory has severe economic problems, and that federal and local officials both bear some responsibility. To its credit, the editorial also suggests the main culprit, Puerto Rico’s political status.
Island residents cannot vote for president or United States senators. I represent them in the House of Representatives, but cannot vote on the floor.
Moreover, the Constitution gives Congress license to treat Puerto Rico worse than the states under federal law, and Congress often uses that license.
Indeed, the editorial endorses my bill in Congress to authorize government-owned companies in the territory to adjust their debts in Chapter 9 bankruptcy proceedings, a power Puerto Rico would automatically have if it were a state.
No people have ever prospered while being treated unequally, and it is not reasonable to expect Puerto Rico to be the exception to that rule. For my constituents to have the bright economic future they deserve, Puerto Rico must become a state.
PEDRO R. PIERLUISI
Washington
The writer, a Democrat, is Puerto Rico’s delegate in Congress.
On July 25, 1898, during the Spanish-American War, the U.S. invaded Puerto Rico with a landing at Guánica. As an outcome of the war, Spain ceded Puerto Rico, the Philippines and Guam (which were then under Spanish sovereignty) to the U.S. under the Treaty of Paris.
Why do I lead with this bit of history? As has been very well documented and publicly discussed, the financial fortunes of the Commonwealth of Puerto Rico have for nearly 117 years been both indirectly and directly tied to the United States. Despite legislative initiatives from the U.S. Congress to stimulate economic activity and significant tax benefits for accessing the capital markets, the Commonwealth today finds itself hard pressed to find ways to stimulate its economy and extricate itself from over $70 billion in debt it needs to honor.
As of this writing, most of the debt resides at the lower end of non-investment grade. While private equity and hedge fund investors have taken the lead in terms of outstanding bonds held, discussions and negotiations with the Commonwealth have yet to generate a solution that leads away from a transformational restructuring of the debt. Bonds continue to trade in the marketplace, evidencing some measure of liquidity and perhaps expectations that a solution will soon be reached.
Moody's Investors Service, however, just released a report on May 4 (titled Commonwealth of Puerto Rico - U.S. State Governments: Legislature's Rejection of Tax Overhaul Plan Casts Doubt on Financing Plans), which suggests that the recent legislative rejection of the governor's value added tax (VAT) proposal is "negative for the U.S. territory because it delays efforts to issue more than $2 billion of bonds to restore cash for operations and debt service. Without the bond sale or another infusion of cash, Puerto Rico will face increasingly difficult choices, including potential government shutdowns."
Moody's went on to say that U.S. Secretary of the Treasury Jack Lew has been in contact with Puerto Rico's governor, urging him to find a solution, noting that federal intervention, "would be unprecedented, and our ratings for U.S. state and local governments do not assume the national government will provide financial support in such situations."
We continue to monitor developments, both with interest and concern, as the potential impact to the municipal marketplace of a negative outcome would be meaningful.
Puerto Rico’s governor said Friday he will soon submit one of the most austere budgets in the island’s history and appealed to President Barack Obama’s administration and a divided local legislature to work together in finding solutions for the U.S. territory’s fiscal crisis.
The call from Gov. Alejandro Garcia Padilla came just hours after Puerto Rico’s Government Development Bank released a report warning of a possible moratorium on debt payments. The bank also said it and the government could run out of money in the first quarter of fiscal year 2016 if new revenue isn’t generated soon.
“Liquidity is significantly strained,” the report said.
Bank officials also said the government might not have enough money to fund public programs and services and honor debt payments unless it goes through with a planned bond sale or approves an alternate measure to raise money.
Puerto Rico is struggling to raise new revenue as it faces $72 billion in public debt. Legislators recently rejected a proposal for a new tax despite warnings from Garcia that rejection would have a detrimental effect on an increasingly unstable economy. Garcia has since said he would act alone if needed within his constitutional powers as the island struggles through a nearly decade-long economic slump.
“The current crisis was not created overnight and it cannot be resolved from one day to the next,” the governor said as he urged the U.S. Congress to approve a measure that would allow Puerto Rico to file for bankruptcy under Chapter 9.
There are currently no federal or local laws that allow Puerto Rico to declare bankruptcy if needed, and investors are growing increasingly concerned that some state agencies might go bankrupt. A federal judge ruled in February that a local law that would have allowed public agencies to restructure their debts was unconstitutional. Garcia’s administration is appealing the ruling.
In addition to the proposed budget, Garcia’s administration also is working on a five-year fiscal adjustment plan. The development bank projected that the government will end this fiscal year with a $191 million budget deficit following an estimated revenue shortfall of $651 million.
Puerto Rico's just-released financial report was more ominous than its previous ones, as the government looked to spur legislative action to address its "fiscal crisis."
The commonwealth in fiscal 2016 "may lack sufficient resources to fund all necessary governmental programs" requiring "emergency measures [possibly including] a moratorium on payment of debt service," the report said. The report was billed as a quarterly, although it was the first one issued since October.
The earlier report had similar language, but didn't specifically mention the coming months or fiscal year as periods for concern.
Since the start of 2014 Puerto Rico's government has highlighted risks to its finances in these reports, while striking a more positive tone in its occasional investor webcasts. This time, it was followed by a press release from Puerto Rico's New York publicity firm, which said the report "demonstrates the impending nature of Puerto Rico's fiscal crisis."
If the government is not able to achieve a balanced budget in fiscal 2016, the commonwealth "may be forced to take emergency measures," the report said. These could include measures to reduce spending. They could also "include a moratorium on the payment of debt service, a debt adjustment, or the utilization for the payment of the commonwealth's debt service of certain taxes and other revenues previously assigned by law to certain public corporations to secure their indebtedness."
Both the October and the May reports refer to the possibility of turning to the U.S. Congress to allow Puerto Rico to restructure its debt. The October report had a sentence in bold that said it did not plan to do this at the time, a qualifier that's been dropped from the May report.
The fact that the commonwealth is talking about non-repayment of debt with regards to fiscal 2016, which starts on July 1, "tells that they are a little more serious about this possibility than they were when they did the last report," a municipal analyst who follows Puerto Rico said.
AllianceBernstein Director of Municipal Research Joseph Rosenblum agreed in an email that "it seems more dire." He added that the change in tone "is not totally surprising given the events over the last few months - inability to access the market; weaker revenues; failed tax reform (more because of its needed added revenue); and continued economic weakness. So that all means weaker liquidity and the challenge of trying to maintain service levels and honor debt commitments."
In the press release, Governor Alejandro García Padilla said: "The Commonwealth Report clearly lays out the fiscal situation and I hope it serves to motivate the Administration, Congress, the Puerto Rico Legislature, and other important allies to work with us to find a reasonable and orderly solution to our fiscal crisis."
The report said that due to several revenue and expense factors, the government faces a $2.4 billion deficit in the coming fiscal year, assuming no steps are taken to increase revenue or cut expenditures. For comparison, the current fiscal year budget is $9.56 billion.
The report projected that the current fiscal year will end with a deficit of $191 million. It indicated that the government believes it has resources to pay off its debts in the current fiscal year. It raised concerns about the commonwealth's and the Government Development Bank for Puerto Rico's ability to make roughly $800 million in payments in July and August.
The report also talked about a potential concern for the Puerto Rico Aqueduct and Sewer Authority. On March 2 the authority extended a $200 million bank loan until May 29, anticipating it would sell a bond that would, among other things, pay off this loan before May 29. The report indicates this bond sale is still a possibility dependent on "market conditions."
However, PRASA may not make the sale or find other sources of liquidity. In anticipation of this the authority's bond trustee is drawing upon gross revenues from May 1 to May 29 to pay the banks. If the bond sale isn't made by May 29, this money wouldn't be enough and the bond trustee would draw from various collateral accounts.
This draw would "materially affect PRASA's liquidity and, as a consequence, its ability to perform essential public services," the report said. As a consequence, PRASA may have to increase utility rates before July 31, 2016.
Investors in Puerto Rico’s public agencies could feel like victims of a “bait and switch” if the corporations were permitted to file for bankruptcy, Assured Guaranty Ltd. Chief Executive Officer Dominic Frederico said.
U.S. Congress should carefully consider the consequences of a bill, introduced by Pedro Pierluisi, Puerto Rico’s nonvoting congressional delegate, that would allow such a move, Frederico, said on a call today with analysts. Assured guarantees bonds of the junk-rated Caribbean commonwealth.
“A huge number of people bought Puerto Rico debt with the understanding that bankruptcy was not permitted,” Frederico said. “Credit integrity is a cornerstone for accessing the market, which is critical to Puerto Rico’s future.”
Puerto Rico warned in a quarterly filing Thursday that it could place a moratorium on debt servicing or use income from its public corporations to repay obligations in the next fiscal year if the government can’t enact spending cuts or generate more revenue.
The commonwealth of 3.5 million and its agencies owe $72 billion. Assured had about $6 billion of exposure to Puerto Rico bonds as of March 31, financial documents show.
Puerto Rico's public employees will be furloughed without pay for two days each month to reduce government spending, the director of the Office of Management and Budget, Luis Cruz Batista, announced Thursday.
One work day every two weeks will be eliminated for all public employees, except for police officers, teachers and corrections officials, Cruz Batista said.
The measure is expected to save the government $50 million.
This is the first of several measures the island's government is considering with an eye toward cutting the current budget by 15 percent, or $1.5 billion.
Other measures that may be announced in the coming days as the government outlines its budget include reducing the funds allocated to the University of Puerto Rico, among other public entities, by 20 percent.
Also, government contracts in certain sectors, especially in education, will be eliminated, subsidies of non-profit entities will be suspended and funds given to the island's 78 municipalities will be cut back.
Last week the legislature rejected a tax reform plan that proponents say would have raised revenues by $1.5 billion.
With an accumulated debt of $73 billion and having been in a recession for more than eight years, Puerto Rico does not have the ability to go to the financial markets for more loans. In addition, the government is having difficulties paying bondholders and may have to shut down in less than 90 days if it cannot somehow increase its available funds.
Solus Alternative Asset Management took over a $146 million loan of Puerto Rico’s cash-strapped power utility from a division of Citigroup Inc. as a deal allowing debt principal to go unpaid extends into June, according to documents published by the island’s development bank.
Solus, a hedge fund that manages $5.7 billion and invests in distressed debt, signed the latest extension of a pact between the Puerto Rico Electric Power Authority and its lenders that’s keeping the energy producer out of default, a copy of the agreement dated April 30 and posted on the website of the Government Development Bank shows. Signers of the forbearance agreement attest that they hold a $146 million loan issued by the utility, known as Prepa.
A representative for the Puerto Rico office of Citibank N.A., a division of Citigroup that provides retail banking services, had signed the original agreement in August and two amendments to the pact this year, according to copies of the documents on the GDB website. Reuters earlier reported that Citi sold the loan to Solus, citing people it didn’t identify.
Opposite Views
While Marathon Asset Management’s Bruce Richards and Doubleline Capital’s Jeffrey Gundlach have touted Puerto Rico bonds this week as an investment that will make money, Pacific Investment Management Co.’s Sean McCarthy has been less sanguine and said Pimco “remains unenthusiastic” about the commonwealth’s debt. The U.S. territory’s liquidity has been drying up as traditional purchasers of municipal borrowings have refused to fund new debt and pulled existing positions.
Julia Kosygina, a spokeswoman for New York-based Solus at Abernathy MacGregor Group Inc., and Robert Julavits, a spokesman for Citigroup, declined to comment. Paul Scarpetta, a New York-based spokesman for the GDB at Sard Verbinnen & Co, didn’t immediately respond to telephone calls and e-mail messages seeking comment.
Solus is among a group of asset managers that have signed a separate pact that agrees to forbear on the utility’s more than $8 billion of bond debt, according to copies of the agreement. Ten other investors including hedge-fund firm Marathon Asset Management have signed the original agreement or extensions of it. The bondholders, along with three bond insurers, own at least $4.99 billion, or 60 percent, of Prepa’s bonds, according to the documents.
Puerto Rico’s fortunes continue to fall. Last week, the legislature voted down a proposed tax that would have helped fund a planned $2 billion bond issue by the territory. Now, the future of that bond issue, which is primarily to restore cash for operations and debt service, is unclear. Puerto Rico is facing enormous problems with liquidity -- it doesn’t have enough cash on hand to keep the government operating -- and is saddled with billions in debt with payment due dates approaching. It has also been in a recession for nearly a decade.
The tax proposal voted down on April 30 would have replaced the commonwealth’s 7 percent sales tax with a 14 percent value-added-tax, a type of consumption tax that a government places on a product whenever value is added at a stage of production and at final sale. A Moody’s Investor’s Service analysis this week said available cash at the end of March fell to $1.1 billion, “and we expect this trend to continue unless the commonwealth can execute the planned bond sale. Without the bond sale or another infusion of cash,” Moody’s continued, “Puerto Rico will face increasingly difficult choices, including potential government shutdowns.”
Faster than a glacier
It takes governments more than half a year on average to file audited year-end financial reports, the Municipal Securities Rulemaking Board found in its annual analysis released this week. This 200-day average is “virtually unchanged” from the previous four years, the report said. When the report accounts for “catch-up” disclosures, submissions made more than 12 months after the end of a fiscal year to correct a prior year’s failure to make a timely submission, the time lapse is much greater. When these cases are included the average time between the end of a fiscal year and the disclosure filing is 448 days, roughly a year and three months. That’s more than three months longer than the 2013 average, a change that the MSRB attributes to a federal initiative last year that encouraged governments to review their disclosures over the past five years and file anything that they may have overlooked before.
Oklahoma feeling the oil price pressure
Low oil and natural gas prices are hurting Oklahoma’s tax collections, State Treasurer Ken Miller announced this week. April’s total intake (which include taxes on income, sales, oil and natural gas, motor vehicle and other sources) was $1.32 billion, just 0.5 percent higher than April 2014. Making a big dent was the collection from gross production taxes on oil and natural gas, which dropped by more than 54 percent from last April, to $33.2 million last month, “levels not seen in more than a dozen years,” according to the treasurer’s office. Producers are also scaling back. The Baker Hughes report on drilling activity this week shows 108 oil wells are in development, the treasurer said, down by 39 percent from a year ago. Notably, zero gas wells are in development this week compared to 17 last May.
Over the last 12 months, oil and gas production receipts have dropped by about 6 percent compared with the prior year. But strong collections from sales and income taxes have helped counter that dip. Total tax collections for the last 12 months are up by 4 percent from the previous year.
“These numbers indicate Oklahoma’s economy is still thriving, but growth is more subdued than during the past few years,” Miller said. “Due to April’s tax filing deadline, income tax collections provided a boost to the bottom line to counter the impact of falling gross production tax receipts.”
Big challenges still lie ahead for many debt-stricken municipalities, including Detroit, Stockton and Puerto Rico.
But overall, the municipal bond market, $3.7 trillion and counting, managed to outperform nearly all other asset classes in 2014, including U.S. equities, treasuries, investment-grade and high-yield corporate bonds.
So what lies ahead after last year's stellar performance?
According to Peter Hayes, head of the $116 billion municipal bond group at BlackRock, the outlook remains bright, provided you rein in expectations.
Hayes told CNBC's "Power Lunch" Thursday "Those outsize returns of 2014 are a thing of the past, particularly in a rising rate environment. It is simply not in the cards. We'll get just fraction of the returns we saw last year
Investors shouldn't expect smooth sailing either. "While the road ahead looks positive," said Hayes, "I anticipate quite a bit of volatility along the way. "
One region Hayes is avoiding is Puerto Rico, which has been floundering under the weight of $72 billion in government and agency debt for over a year.
"In the Commonwealth, you are taking on emerging market-like debt, so you better be very comfortable with the volatility that comes with that."
Bottom line?
"No matter how you slice it," Hayes said, "We think Puerto Rico's problems will have a much wider negative impact on the municipality markets than previously thought "
Scott Mlyn | CNBC
BlackRock signage above building entrance in New York.
A few reactions to today’s oral arguments before the U.S. Court of Appeals for the First Circuit regarding the validity of Puerto Rico’s Recovery Act:
On the three judge panel, Chief Judge Lynch seemed prepared to uphold the lower court decision invalidating the Recovery Act; she suggested that Congress’s amendment of the Bankruptcy Code to eliminate the Chapter 9 eligibility of Puerto Rico’s instrumentalities could be interpreted as reflecting Congressional intent that Congress, and not Puerto Rico, should determine how to deal with Puerto Rico’s municipal insolvencies. Judge Torruella seemed more sympathetic to Puerto Rico’s arguments that the statutory language does not articulate any such intent, that there is no legislative history as to the rationale for the removal of Puerto Rico from Chapter 9 eligibility, and that Congressional intent to preempt Puerto Rico’s use of its police power to enact bankruptcy legislation addressing a fiscal crisis cannot be assumed absent affirmative evidence of such intent. The third judge on the panel, Judge Howard, asked fewer questions, but asked some pointed ones relating to the potential severability of certain provisions of the Recovery Act. At the end of the arguments, Chief Judge Lynch characterized the case as an important one and pledged that the court would “work hard” on its decision.
On the basis of the judges’ questions, it seems more likely that the panel will uphold the lower court’s decision than that it will reverse it, although the decision may be a close one. It is possible that the court will remand the case back to the District Court with instructions to determine whether provisions of the Recovery Act that do not impact nonconsenting creditors can be salvaged by severing those that do (versus invalidating the entire Recovery Act), but it is questionable that such a statute, and such an exercise, would be of any utility.
Either way, there is a good chance that the First Circuit’s opinion will turn out to be a way station on a longer road, the next segment of which will be an appeal to the U.S. Supreme Court.
The appellants pressed their arguments that, read literally, Section 903 of the Bankruptcy Code is only applicable in situations involving a Chapter 9 debtor, which Puerto Rico instrumentalities by definition cannot be, and that the lower court therefore misconstrued Section 903 in holding its restrictions on nonfederal bankruptcy statutes applicable to Puerto Rico. The oral arguments then focused primarily on whether a literal interpretation of Section 903 as inapplicable to Puerto Rico would or would not lead to absurd results and/or results that Congress could not have intended, and on what Congressional intent can be inferred (given little, if any, applicable legislative history) from the chronology of revisions to provisions of federal bankruptcy statutes impacting the inclusion or exclusion from federal bankruptcy eligibility of the District of Columbia, Puerto Rico and other territories. Each side construed the legislative chronology as clearly supporting their clients’ views of whether Congress’s ultimate exclusion of Puerto Rico’s instrumentalities from Chapter 9 eligibility was or wasn’t intended to leave Congress with the sole power to enact any bankruptcy statute for such excluded instrumentalities. When Judge Torruella asserted that it would be highly unusual for Congress to leave Puerto Rico in a “no man’s land” with no recourse to any bankruptcy process, Chief Judge Lynch countered that perhaps Congress did not intend to leave Puerto Rico’s municipalities in limbo forever, but that it might take time for Congress to decide what approach to take.
Addressing arguments by the appellees that it would make no sense for Congress to eliminate Puerto Rico’s Chapter 9 eligibility while permitting Puerto Rico to “xerox Chapter 9 and make it worse” through a statute such as the Recovery Act, appellants’ counsel reminded the judges that Puerto Rico would be subject to substantial federal law constraints, such as the contracts clause, that would not be applicable in a Chapter 9 proceeding. That is accurate, and brings to the fore the question of whether, even if Puerto Rico were to persuade the First Circuit or the U.S. Supreme Court that Section 903 does not preempt the Recovery Act or invalidate its key provisions, it will have done itself any favors. Although the contracts clause is not impregnable, it sets a high bar for a public instrumentality’s restructuring of its own debts. The Section 903 litigation is only the first salvo in an armada of facial and as applied legal assaults that would face any Puerto Rico issuer attempting to break its bond contracts. Puerto Rico clearly believes that having a Recovery Act gives it more leverage in creditor negotiations than not having it, but any meaningful restructuring under the Recovery Act might well be legally ineffectual. Whatever happens to the Recovery Act, Puerto Rico needs to find other ways to address its fiscal issues.
WALTHAM, Mass., May 7, 2015 /PRNewswire/ -- Ilios Dynamics Inc., a subsidiary of Tecogen® Inc. TGEN, +2.99% today announced the sale of an Ilios HEWH-500-WS and an Ilios HEWH-500-AS; water-source and air-source gas engine-driven heat pumps, respectively.
The Ilios units, sold to Cogen RightFit, will be installed at two major multinational pharmaceutical manufacturing facilities. Cogen RightFit, LLC is a joint venture between ESCOPR, one of Puerto Rico's premier energy conservation providers and Tropigas Puerto Rico, one of the largest LPG (Liquefied Petroleum Gas) suppliers on the island.
"We are very excited to be working together with Cogen RightFit," said Stephen Lafaille, Ilios Product Manager. "ESCOPR has a great reputation on the island for providing engineered efficiency solutions and Tropigas is a major LPG supplier delivering competitive fuel pricing for customers – it's truly a winning combination. The energy costs are very high in Puerto Rico and the Ilios products deliver an immediate impact on the bottom line with minimal capital investment; a reduction in greenhouse gas emissions and reduced pollutant emissions with Tecogen's patented Ultra™ after-treatment system."
"The sale of these Ilios units is just the beginning for us in Puerto Rico, said Jorge Hernandez, President of ESCOPR and Partner of Cogen RightFit, LLC. We are interested in not only the Ilios heat pumps but also all of Tecogen's packaged CHP products such as cogeneration modules and large gas-engine driven chillers. There is an incredible customer base here in Puerto Rico with many manufacturing and industrial clients, almost all of which have massive needs for process heating, cooling, and electricity, and often times all three simultaneously. These products will also be a great fit in the resort and hospitality sector which are increasingly becoming aware of their energy use and are looking to make energy reductions to improve their bottom line as well as their sustainable image."
"We see highly efficient, packaged CHP products such as the Ilios heat pump as an opportunity to sustainably grow our LPG business and continue to offset heavy fuel oils which unfortunately are still used in many industrial facilities on the island. These products will not only help convert our clients to clean burning LPG but they will do it in a way that saves them energy and reduces the carbon impact of their facility," said Humberto Berrios, President of Tropigas Puerto Rico and Cogen RightFit partner.
About Ilios Dynamics Ilios Dynamics Inc., a subsidiary of Tecogen Inc., was formed in April 2009 to develop and distribute a line of ultra high-efficiency heating products for commercial and industrial applications utilizing advanced thermodynamic principles. Products incorporate mechanical work to extract heat from the environment to supplement chemical energy available from natural gas or propane. The result is a significant boost in efficiency and reduced carbon emissions relative to conventional heating systems. Please visit www.iliosdynamics.com.
About Cogen RightFit, LLC.Cogen RightFit LLC. is a joint venture between ESCOPR and Tropigas Puerto Rico. By combining the engineering expertise of ESCOPR with the fuel supply expertise of Tropigas Puerto Rico, Cogen RightFit can provide unmatched combined heat and power "CHP" solutions at the best price and lock in a long term sustainable operating cost structure for their clients.
About ESCOPRESCOPR has been serving Puerto Rico and the Caribbean for over 10 years providing complete engineering solutions for energy & water conservation projects for a long list of multi-national industrial and commercial clients. For more information, please visit www.escopr.net.
About Tropigas Puerto RicoTropigas of Puerto Rico is Puerto Rico's leading LPG supplier and has been serving the island for over 50 years. They are the leader in the industrial and commercial market segment and have been the driving force in many of the islands major industrial oil-to-LPG conversions. For more information, please visit www.tropigaspr.net.
About TecogenTecogen manufactures, installs, and maintains high efficiency, ultra-clean combined heat and power products including natural gas engine-driven cogeneration, air conditioning systems, and high-efficiency water heaters for residential, commercial, recreational and industrial use. The company is known for cost efficient, environmentally friendly and reliable products for energy production that, through patented technology, nearly eliminate criteria pollutants and significantly reduce a building's carbon footprint.
In business for over 20 years, Tecogen has shipped more than 2,000 units, supported by an established network of engineering, sales, and service personnel across the United States. For more information, please visit www.tecogen.com.
On May 2, 1975, the heads of New York’s three largest banks told Governor Hugh Carey they would no longer buy New York City’s debt. With that, the world’s financial capital was pushed to the brink of default.
The conditions that gave rise to New York City’s fiscal crisis four decades ago are mirrored in Puerto Rico today: a recessionary economy, shrinking population and years of unsustainable borrowing to pay bills.
Yet as the Caribbean commonwealth struggles with $73 billion of debt, it may not be able to follow the path that saved New York. There, political and labor leaders ceded power to an unelected board that oversaw the city as it cut tens of thousands of jobs, froze employee wages and raised taxes.
All that was made easier because the U.S. government stepped in with loans that left Wall Street willing to buy the city’s bonds, an option that doesn’t seem open to Puerto Rico.
“We had extraordinary leadership,” said Richard Ravitch, an adviser to Carey during New York City’s fiscal crisis. “Everybody ultimately did what they swore they wouldn’t do.” Photographer: Ron Frehm/AP Photo
“We had extraordinary leadership,” said Richard Ravitch, an adviser to Carey during the crisis. “Everybody ultimately did what they swore they wouldn’t do.”
The same can’t be said yet for the island of 3.5 million people 1,600 miles (2,600 kilometers) to the south. Its legislature is mired in political discord. Washington has shown little interest in rescuing the teetering commonwealth. And investors have pushed yields on Puerto Rico’s 20-year tax-exempt bonds to about 10.5 percent, higher than on Argentina’s benchmark dollar bonds, in default since July.
Political Disarray
Puerto Rico’s effort to repair its finances was cast into disarray last week, when lawmakers rejected Governor Alejandro Garcia Padilla’s proposed tax overhaul. Even some members of his party voted against it. Without the new revenue, Puerto Rico officials said they may not be able to sell $2.9 billion of bonds that would raise money needed to keep the government from shutting down within months.
Puerto Rico warned Thursday that without the borrowing, the government may run out of cash by Sept. 30. The commonwealth said it could place a moratorium on debt payments or put revenue from public corporations toward general obligations next fiscal year if the government can’t cut spending or generate more revenue, according to a quarterly filing posted on the Municipal Securities Rulemaking Board’s website.
‘Not Capable’
Puerto Rico’s effort to emerge from its debt crisis were cast into disarray last week, when lawmakers rejected Governor Alejandro Garcia Padilla’s proposed tax overhaul. Source: GDA via AP Images
“The political system has shown it’s not capable of fixing this on its own,” said Robert Donahue, a managing director at Municipal Market Analytics, a Concord, Massachusetts-based firm.
The pressure on Puerto Rico has been building for years. A government index tracking the economy has dropped in every year but one since 2006, leaving an unemployment rate of 11.8 percent, more than twice the national level. Its population has declined by almost 300,000 since 2004. With spending growing faster than revenue, Puerto Rico has borrowed to close budget deficits, causing its public debt to double over the past decade.
The situation echoes New York in the 1970s, when the oil shock and recession eliminated thousands of jobs and racial tensions caused middle-class professionals to leave for the suburbs.
“These are both political entities faced with an economic problem in which the use of the debt markets was supposed to ameliorate it and instead seems to be exacerbating it,” said Phil Fischer, head of municipal research at Bank of America Corp. in New York.
One path that was open to New York isn’t there for Puerto Rico: The commonwealth can’t file for bankruptcy to reduce its debts, and a bill that would allow its agencies to hasn’t advanced in Congress. Governor Carey opted for negotiations out of court.
“Bankruptcy would have been an admission that democracy couldn’t solve a problem,” said Ravitch.
Control Board
Instead, New York handed its finances to an emergency control board set up by the state. The board gave city officials political cover to reject labor contracts, withhold raises and cut spending. It also overhauled the city’s financial controls and reporting, helping it regain credibility with investors.
Congress has the power to create a control board to impose unpopular austerity measures on Puerto Rico, said Arturo Porzecanski, director of the International Economic Relations Program at American University’s School of International Service in Washington. He said Congress is partly responsible for the debt crisis because it gave Puerto Rico a “free pass” into the capital markets by exempting its debt from federal, state and local income taxes.
“Congress opened the floodgates and so now Congress should take responsibility,” he said.
On Sidelines
Washington has shown little interest in rescuing Puerto Rico because the commonwealth isn’t seen as a threat to the financial system, according to Daniel Hanson, an analyst at Height Securities LLC, a Washington-based broker dealer. In 1975, Felix Rohatyn, the banker who helped rescue the city, argued that a New York default would roil global markets.
Ford to City: Drop Dead. Source: New York Daily News Archive via Getty Images
“Puerto Rico is simply not politically or financially important enough,” Hanson said. “Puerto Rico is not in a position to get any meaningful relief without some kind congressional action, and frankly, there is no congressional action coming.”
Such federal assistance was key to New York’s rescue. A month after the control board’s creation, the Daily News famously pilloried President Gerald Ford’s initial reluctance to provide aid to New York with the headline: “Ford to City: Drop Dead.”
In exchange for $2.3 billion in short-term federal loans, New York’s leaders, banks and labor unions had to accept tough conditions.
Tax Increase
The city raised $200 million in new taxes. Public-employee unions agreed to job cuts and a wage freeze, while their pension funds bought new city debt. Tuition was imposed at City University of New York and transit fares raised. For their part, banks exchanged city notes for long-term bonds, while payments to other holders of short-term debt were postponed.
A Mistake
Puerto Rico Governor Garcia Padilla said last week that defaulting on the commonwealth’s bonds would be a mistake and that he’s crafting a plan to steady the junk-rated island’s finances.
El Nuevo Dia, a Puerto Rican newspaper, said the government is planning $1.5 billion in budget cuts, while the chairman of the Senate’s finance committee said lawmakers could raise the island’s 7 percent sales tax by two to three percentage points.
The U.S. Treasury Department has been offering Puerto Rico advice on how to ease its financial burdens and make sure it receives all of the federal funding it’s eligible for, about $6 billion a year. Bond-market analysts have said they don’t anticipate more extensive aid, such as loan guarantees, that would require approval from Congress.
Porzecanski, the American University professor, said Washington may have to get involved to keep the crisis from jeopardizing public safety on the island and the retirement accounts of Americans. About half of U.S. municipal bond funds own the commonwealth’s debt, according to Morningstar Inc.
“We can pretend that Puerto Rico isn’t our problem, and that because they have an elected government they can take care of the situation,” he said. “Or we can look at the facts.”
Big M.A.C. (Municipal Assistance Corporation) Chairman Felix Rohatyn, from left, Governor Hugh Carey and New York City Mayor Abe Beame. Photographer: Bill Stahl Jr./NY Daily News Archive via Getty Images
Citibank (C.N) has sold a $146 million loan it had with the Puerto Rico Electric Power Authority (PREPA) to a distressed debt investment firm, two sources said on Thursday, in a sign of the growing uncertainty over the utility's finances.
PREPA's bank lenders and other bondholders are disputing who has priority in loan repayments, said one of the sources, who are familiar with the utility's ongoing, private debt restructuring talks and requested anonymity.
Citi sold its loan to Solus Alternative Asset Management, the sources said. Solus replaced Citi in an April 30 forbearance agreement with PREPA's lenders posted on the website of Puerto Rico's Government Development Bank (GDB).
A Citi spokesman declined to comment on Thursday. PREPA and Solus did not return a request for comment.
PREPA is trying to restructure $9 billion in debt, held largely by bondholders who resist taking any write-down in their investments, and are pushing for other cost saving measures, like higher electricity rates.
Citi's $146 million loan was part of a larger credit line of around $700 million, which PREPA uses to buy oil. Another $525 million is held by a consortium led by Scotiabank. One member of that consortium, Oriental Bank, put its $200 million portion on a non-accrual status in April and took a $24 million provision.
The utility is scheduled to make a payment of around $400 million on July 1.
The agreements, which prevent creditors from calling a default, are also posted on the GDB website.
Repairing PREPA is a key component in fixing Puerto Rico's broken economy and cutting its more than $70 billion debt load.
Ongoing unpredictability at PREPA is proving to be an obstacle in Puerto Rico's broader efforts to raise about $3 billion to stave off steep budget cuts and a possible government shutdown around the end of June.
Solus has been active in the bankruptcy realm, most recently in LightSquared, where it made a play for control of the bankrupt wireless venture, acquiring its loan debt and then pursuing an ultimately unsuccessful restructuring that would have given it a big equity stake.
Solus was also part of a group of lenders that wound up owning shipping company Genco after it reached a deal to emerge from bankruptcy last year.
(Reporting by Nick Brown and Ed Krudy; Editing by Richard Chang)
Pacific Investment Management Co. said Wednesday it “remains unenthusiastic” about Puerto Rico’s debt because of the island’s elevated borrowing costs and the potential for “draconian” budget cuts.
The struggling U.S. territory has demonstrated “a willingness to impair contracts,” and some politicians have suggested changing the constitution to allow a default on the island’s general-obligation debt, Sean McCarthy, a director at Pimco in New York, said in a note published on the firm’s website.
