Puerto Rico to begin rationing water

San Juan, Jul 30 (EFE).- Drought-stricken Puerto Rico soon will begin implementing an alternate-day water rationing plan that will affect some 300,000 residents of greater San Juan.

Water rationing will begin on Aug. 6 for customers served by the Carraizo reservoir, the president of the state-owned utility AAA, Alberto Lazaro, told a press conference.

Customers whose water comes from the La Plata reservoir will have to join the rationing program starting on Aug. 14.

Lazaro said that the water cutbacks will only affect AAA customers who are supplied from those two reservoirs, which provide water to part of the metropolitan area, where about half of Puerto Rico's 3.6 million people live.

The rest of the island, for the moment, will not have to suffer any kind of water cutbacks given that the reservoirs supplying them are remaining at acceptable levels.

Lazaro said that the supply cuts are conditioned on the possible arrival of rain, since a weather system that could bring precipitation to Puerto Rico next weekend is moving toward the island.

He said that customers affected by the cutbacks will continue to receive water from cistern trucks between 7 and 9 a.m. on days when rationing is in effect.

He recommended that members of the public store two or three gallons of water per person per day for the days when the water supply is curtailed.

Puerto Rico's Department of Consumer Affairs on Wednesday issued an order freezing prices for bottled water, ice, cisterns, cistern parts and, in general, any item related to water.

The moderate drought that Puerto Rico has been experiencing for months has caused damage to the island's crops, as Agriculture Secretary Myrna Comas Pagan said on Tuesday, noting that $20 million in losses has been sustained so far due to the lack of rainfall.

Meanwhile, authorities have implemented a plan to subsidize the purchase of concentrated feed for livestock raisers, a fund for which an initial $170,000 has been allocated.

Puerto Rico to begin rationing water

Puerto Rico's Economy Is Gasping For Air - Zamansky LLC

Like a boxer staggering against the ropes at the end of a 15 round, grueling fight, Puerto Rico’s economy is heading down for the count. Meanwhile, Mom and Pop investors in Puerto Rico’s debt face getting the shaft due to a new law that puts government agencies first and investors second.

Puerto Rico’s problems are well known. The island’s $70 billion debt is exploding, residents and taxpayers are fleeing in search of a better life in the states and virtually all government municipal bonds have been downgraded to “junk” status.

But, as a “territory” of the U.S., it cannot go bankrupt like Detroit. However, in a desperate move, Puerto Rico’s government recently passed a law allowing certain government-run corporations like PREPA, its electric utility, to file for bankruptcy and restructure its crushing debt. This move drew a lawsuit by bondholders claiming that the law is unconstitutional as only the U.S. Congress can tinker with bankruptcy laws.

At the same time, many hundreds of retirees, whose portfolios at UBS and other banks were comprised of bond funds holding degraded government debt, have hired investment fraud attorneys to try to recoup their losses.

With the force of a summer storm gathering strength and churning offshore, steep losses are coming for Puerto Rico and its investors, according to Nick Brown and Tom Hals of Reuters.

“Momentum is building toward a deal that would make painful losses inevitable for investors holding about $20 billion in bonds issued by Puerto Rico’s highway, water and electricity authorities even as some big U.S. mutual funds launch a legal battle to squelch a new law that authorizes a restructuring,” according to Brown and Hals’ report. “The Puerto Rican government and most of its creditors have hired U.S.-based bankruptcy experts to advise them through the Caribbean islands efforts to solve its debt problem, and the resolution figures to look a lot like a U.S.-style bankruptcy.”

The key issue for Puerto Rico investors is the new law allowing bankruptcy for Puerto Rico’s agencies, according to Reuters and other news reports. “The crisis came to a head late last month when Governor Alejandro Garcia Padilla pushed through the Public Corporations Debt Enforcement and Recovery Act to create a bankruptcy-like process for restructuring the debt of commonwealth-run corporations. That caused prices on some of the bonds of the electric utility, known as PREPA, to fall to 40 cents on the dollar or below. PREPA is widely viewed to be in the weakest condition of the agencies.”

Meanwhile, mutual fund giants like Oppenheimer and Franklin Templeton want to roll back the new law.

“Municipal bond mutual funds including Oppenheimer & Co. and Franklin Templeton sued to block the law,” according to Reuters. “Some of their funds have suffered negative returns since the Recovery Act triggered the decline in Puerto Rico bonds, a long-time favorite among fund managers thanks to their triple tax-free status and fat yields.”

Unfortunately, retail bond investors are likely to suffer the biggest blow from Puerto Rico’s impending disaster.

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions, including UBS. For more information about Zamansky LLC, please visit http://www.ubspuertoricofunds.com/.

Puerto Rico's Economy Is Gasping For Air - Zamansky LLC

Wall Street Job Boom Fades as Puerto Rico Convulses: Muni Credit

Money managers in the municipal market are adding analysts at the slowest pace since before the financial crisis, a sign research staffs are able to manage the volatility stemming from beleaguered Puerto Rico.

AllianceBernstein Holding LP, Nuveen Asset Management, T. Rowe Price Group Inc. and Vanguard Group Inc. -- which combined have 59 researchers and oversee about $270 billion in munis -- haven’t added analysts in the past year-and-a-half. Neither have banks such as Barclays Plc. (BARC) Morningstar Inc. in Chicago stopped providing muni research as of June 30.

The hiring freeze coincides with a slowdown in issuance that’s leaving the $3.7 trillion market poised to contract for an unprecedented fourth straight year. The scarcity is driving a rally in 2014, led by riskier credits. That shows investors have the analytical power to separate financial woes in Puerto Rico and Detroit from other localities.

“The boom time for analyst employment has come to at least a temporary end,” said Matt Fabian, managing director at Concord, Massachusetts-based research firm Municipal Market Advisors. “You have to be more careful about how you allocate resources.”

Research Reluctance

Membership in the National Federation of Municipal Analysts has risen 2 percent in the past 18 months to 1,348, said Lisa Good, the group’s executive director. That compares with an average 5.3 percent annual increase in the five years after 2008, which was the fastest growth since at least 1990.

The trend reflects a pattern across Wall Street where companies are evaluating staffing costs since the financial crisis, said Jeanne Branthover, managing partner in New York at Boyden Global Executive Search. While investors always need research, it’s a segment that doesn’t generate revenue and is vulnerable during slowdowns, she said.

“When a business stands still or a market shrinks, we’ve seen companies really pay attention to not continuing to hire,” Branthover said. “Research analysts are very much the backbone and support, but they don’t need more of them than the money the group is generating.”

Even in equities, where hiring has picked up as the Standard & Poor’s 500 Index (SPX) sets record highs, new research jobs are minimal, she said.

Finance Oasis

The years after 2008 proved a boom time for muni employment even as other parts of the financial markets faced firings. Subprime-mortgage-backed debt guarantees pummeled bond insurers’ top grades, removing a swath of munis from the AAA universe and prompting a hiring spree for credit research.

The collapse of bond insurance created “the full employment act for analysts,” said Bill Delahunty, head of muni research in Boston at Eaton Vance Management.

The market was also growing at the time. The federal Build America Bonds program pushed local-debt sales to a record $408 billion in 2010. In December that year, banking analyst Meredith Whitney incorrectly predicted “hundreds of billions of dollars” of municipal defaults in the following 12 months, prompting questions about credit quality and spurring an exodus from mutual funds.

This year, supply is 27 percent below 2010, pushing yields to generational lows, and Janney Montgomery Scott forecasts declining issuance through 2017. Credit quality is also improving with the economy. The number of new issuers defaulting is set to be the lowest since at least 2009, according to MMA.

‘Plain Vanilla’

“Much of the market is fairly plain vanilla and stable types of credits,” said Joe Rosenblum, director of muni credit research at New York-based AllianceBernstein, which manages $30 billion of local debt and has eight muni analysts.

“We don’t think you need to pay a lot of attention to those,” he said. “It’s the ones that have potential problems or opportunities that are more complicated, and that’s where we want to focus our analytical time.”

High-yield bonds have gained about 9 percent this year, the best start since 2012 and better than the broad market’s 6.4 percent return, according to S&P Dow Jones Indices. Unrated deals this year include senior communities in Florida and Oregon and a facility that converts biosolids into fertilizer outside Orlando.

Yet over the past year, investors and analysts have been most transfixed by developments in Puerto Rico, which has $73 billion in debt when including its agencies.

Distress Push

Rating companies cut the island to junk in February and lowered it again this month after lawmakers passed a bill allowing some public corporations to restructure their debt. Commonwealth debtplunged 6.4 percent in the week through July 4, the largest drop since at least 1999, S&P Dow Jones Indices data show.

Demand for Puerto Rico bonds has shifted from traditional muni funds to hedge funds, potentially quelling the need for extra analysts.

Default is already a reality for holders of Detroit debt. The Motor City filed a record bankruptcy a year ago and plans to repay some bondholders as little as 11 cents on the dollar.

“There was definitely a scramble to get some analysts in place over the past couple of years -- it was the downgrade of the bond insurers and credit stories in Puerto Rico, Detroit,” said Delahunty at Eaton Vance. “Now it can really be firm by firm.”

The company, which oversees $26 billion in local debt, added one muni analyst in the past year, for a total of 15.

Hiring Breakdown

Vanguard, based in Valley Forge, Pennsylvania, has 20 muni credit researchers, unchanged from the start of 2013. Chicago-based Nuveen has 23, with no additions since 2012. Baltimore-based T. Rowe has had eight muni analysts since 2008.

At Morningstar, Jeff Westergaard remained head of fixed-income data and analytics after the company discontinued muni research because of insufficient demand, said Nadine Youssef, a spokeswoman. Of the others working on the research service, one took on a new role and the other left, she said.

Barclays in January 2012 hired Tom Weyl from Eaton Vance as its head of muni research and hasn’t added muni researchers since 2013.

The NFMA says it consists primarily of research analysts from mutual funds, insurance companies, broker dealers, bond insurers, ratings companies and advisory firms.

Regional groups associated with the NFMA include the Municipal Analysts Group of New York, or Magny, which was founded in 1949. Job postings on Magny’s website include positions atMoody’s Corp. (MCO), MetLife Inc. and Deutsche Bank AG. (DBK)

Positions on NFMA’s website are down from two or three years ago, Delahunty said.

It’s a sign a shift may be ahead in the industry because of falling underwriter fees and subdued supply, said Fabian, who led Magny from 2010 to 2011.

In contrast with the buildup after the financial crisis, “we might even see a reverse because analysts are expensive,” he said.

To contact the reporter on this story: Brian Chappatta in New York atbchappatta1@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman atsmerelman@bloomberg.net Mark Tannenbaum, Mark Schoifet

By Brian Chappatta

Wall Street Job Boom Fades as Puerto Rico Convulses: Muni Credit

US Jan-May cement shipments up 6% YoY

Total shipments of Portland and blended cement in the United States and Puerto Rico for the year through May 2014 were 31.2Mt, up by around six per cent compared to the same period of last year, latest data from the US Geological Survey shows.

In May alone, shipments rose by around six per cent to 8.1Mt. The leading Portland cement-producing states during the month were Texas, Missouri, California, Florida and Michigan, in descending order, accounting for about 44 per cent of the total output. The leading consuming states (Texas, California, Florida, Ohio and Illinois, in descending order) received about 37 per cent of the May total shipments.

Clinker production totaled 7.14Mt in May 2014, up by six per cent from the output in May 2013. Production for the year through to the end of May 2014 totalled 27.20Mt, up by about four per cent YoY. The leading clinker-producing states in May were Texas, Missouri, California, Florida and Pennsylvania, in descending order, and these accounted for about 47 per cent of total output for the month.

May 2014 imports of cement and clinker of 826,000t were 27 per cent higher than those in May 2013. Imports for the year through May totaled 2.63Mt, up by about five per cent from the same period of 2013.

US Jan-May cement shipments up 6% YoY

Bond Insurers Surviving Puerto Rico Default Lures Bulls: Options

Bad news for Puerto Rico may be good news for Assured Guaranty Ltd. (AGO), as options traders bet the bond insurer will withstand a possible default by the island’s main electricity provider.

Assured, which backs $852 million of debt issued by the Puerto Rico Electric Power Authority, has seen its shares decline 13 percent since June 19. Trading in the options market is signaling a rebound, with calls trading near the most expensive level to puts in 20 months. The contract with the highest ownership is betting on a 29 percent rally by January, data compiled by Bloomberg show.

Puerto Rico lawmakers approved a bill last month allowing public corporations to restructure debt, and if Prepa defaults, Assured has said it faces a maximum payout of about $65 million a year over a decade. That would be an opportunity for the company to demonstrate the ability to meet claims and bolster its reputation after the 2008 financial crisis led investors to question the reliability of bond insurance.

“Even if it ultimately takes a loss in Puerto Rico, it could be a good loss that would be a testament to the value of insurance,” Mark Palmer, an equity analyst at BTIG Research in New York, said via phone on July 23. “Assured has the wherewithal to not only absorb the impact of a negative outcome at Prepa, but still keep streaming along.”

Interest Payments

Prepa may miss a January interest payment to investors, according to Municipal Market Advisors, potentially triggering a restructuring larger than any by a state or local U.S. government. Investors including BlueMountain Capital Management LLC and Oppenheimer Funds Inc. have asked a U.S. court to block the new Puerto Rico law allowing the restructuring.

If the Puerto Rico power company was to pay less than the bonds’ original prices, insurers such as Assured Guaranty and MBIA Inc.’s National Public Finance Guarantee Corp. would be forced to make up that difference with investors holding insured securities. Other bondholders don’t have that extra security.

Exposure to toxic mortgage-backed securities decimated the bond insurance industry in 2008, as guarantors such as Assured, MBIA and Ambac Financial Group Inc. lost their coveted AAA-ratings, and all but Assured halted business.

The percentage of bonds that carry insurance had the first quarterly increase after at least six years of declines, according to data compiled by Bloomberg. Standard & Poor’s lifted its credit ratings for Assured in March and making investors whole on defaulted Prepa bonds could strengthen the company’s brand, Marc Cohen, an analyst at S&P, said in a phone interview last week.

Calls, Puts

Calls betting on a 10 percent rise in Assured shares cost 0.09 point more than puts betting on a similar-sized loss, the highest level since November 2012, according to data compiled by Bloomberg on six-month contracts.

“The fallout from this Puerto Rico bankruptcy story might not be as large as the market priced in,” Jared Woodard, a senior equity derivatives strategist at New York-based BGC Partners, said by phone on July 25. “What we saw in Assured and MBIA options may have been a bounceback reaction.”

A call and e-mail sent to Prepa’s investor relations office was not immediately returned. Robert Tucker, managing director of investor relations at Assured Guaranty, declined to comment on the options trading.

Among the 10 options with the highest open interest, six are calls. January $30 calls and October $27 calls had the highest open interest among bullish contracts. The stock declined 1 percent to $23.21 last week.

Prepa Default

The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, jumped 5.2 percent to 12.69 last week.

A default by Prepa won’t help bond insurers, according to Stanislas Rouyer, an analyst at Moody’s Investors Service in New York. The rating company this month changed its outlook on the company’s Assured Guaranty Corp. unit’s A3 rating to “negative” and retained a “negative” outlook on its Baa1 grade for the firm’s Assured Guaranty Re Ltd. unit, leaving other divisions with stable outlooks.

“Assured or MBIA paying claims on a potential Puerto Rico default may not necessarily increase the perceived value of the product,” Rouyer said in a July 25 e-mail. “The fact that solvent guarantors pay claims is not new.”

The company is probably already setting money aside to prepare for a default, according to Sean Dargan, an equity analyst at Macquarie Capital USA Inc. Assured increased U.S. public finance-related reserves to $281 million on March 31 from $264 million in December, according to company filings.

“Assured will probably take some losses on Prepa because it will likely restructure, but it’s not a stock that’s totally tied to Puerto Rico,” Dargan said in a July 24 phone interview.

To contact the reporter on this story: Oliver Renick in New York at orenick2@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.netJeff Sutherland

By Oliver Renick

Bond Insurers Surviving Puerto Rico Default Lures Bulls: Options

Passive Muni ETFs Shed Puerto Rico Exposure

Passively managed exchange traded funds usually do not make wholesale changes to their portfolios. Most of the underlying indices for passive ETFs rebalance quarterly and even then, holding and sector changes often boil down to just a few basis points.

However, there are circumstances where issuers of passive ETFs opt to take a more active approach. The meltdown in Puerto Rico’s municipal bond market is proving to be a prime example.

“Fears about Puerto Rico’s escalating fiscal woes underscore how passively run ETFs use a sampling approach to mimic the performance of an index. They’re not obligated to own each of the thousands of constituents there are sometimes in an index, but instead can select the ones they want to track it, according to fund disclosures to investors about their management approach,” report Tim McLaughlin and Ashley Lau for Reuters.

The $1.1 billion Market Vectors High Yield Municipal Index ETF (NYSEArca: HYD) is an example of a passively managed ETF that has noticeably trimmed its exposure to Puerto Rican debt. HYD applies a sampling strategy in tracking the Barclays Municipal Custom High Yield Composite Index (LMEHTR). Following ratings downgrades of the U.S. territory’s debt, that index has seen its exposure to Puerto Rico surge to 30% from 5% at the start of this year, according to Reuters.

However, HYD allocated just 4.3% of its weight to Puerto Rico at the end of June, according to Market Vectors data. That makes Puerto Rico the ETF’s eighth-largest geographic weighting and barely more than the half the weight allocated to California munis.

“I see Puerto Rico’s debt restructuring legislation signed into law two weeks ago, combined with another wave of downgrades by Moody’s, as reference points for the current market. I believe it is an inescapable truth that taxable buyers of Puerto Rico debt seem to be providing some important liquidity for this market,” said Market Vectors Portfolio Manager James Colby in a note out earlier this month. [All Eyes on Puerto Rico]

The $268.1 million SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEArca: HYMB) is another muni ETF that has pared its Puerto Rico exposure. HYMB’s underlying index, the S&P Municipal Yield Index, had a 13% weight to Puerto Rico at the end of June, according to Reuters.

However, HYMB’s weight to the territory was just 7.2% as of July 24, according to State Street data. That is less than half the 16% weight the ETF allocates to California munis. Puerto Rico is HYMB’s seventh-largest geographic exposure.

The Market Vectors Short High-Yield Municipal Index ETF (NYSEArca: SHYD), which debuted in January, also tracks a Barclays index that features a 7.1% weight to Puerto Rico. SHYD, however, has a 5.5% weight to Puerto Rico, or just over half the ETF’s weight to Ohio munis. [New Short-Term Muni ETF Debuts]

Market Vectors High Yield Municipal Index ETF



ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of HYD.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

Passive Muni ETFs Shed Puerto Rico Exposure

Hedge-Fund Pool Supporting Puerto Rico Legislation Adds 14 Firms

A group of hedge funds that formed this month in support of new legislation in Puerto Rico has added 14 members, according to a spokesman for the coalition.

The pool, now with 18 members, has more than $240 billion combined under management, Russ Grote, a Washington-based spokesman at Hamilton Place Strategies, said in an interview. The companies hold about $4.2 billion of Puerto Rico securities, Grote said. He declined to name the new members.

The original members -- Brigade Capital Management LLC, Fir Tree Partners, Monarch Alternative Capital LP and Perry Capital LLC -- all based in New York, said in a July 17 statement that their combined $60 billion of assets could provide a “substantial source of financing” for the U.S. territory.

Demand from hedge funds for Puerto Rico debt has helped the commonwealth raise cash as it struggles to boost its economy. The funds and distressed buyers bought most of the island’s $3.5 billion junk-rated general-obligation deal in March, the biggest ever in the municipal market.

The group “stands behind the efforts of the governor and the commonwealth to enact legislation to substantially eliminate budget deficits and address the financial and operational difficulties facing certain non-guaranteed public corporations,” according to the July 17 statement.

Restructuring Exemption

Lawmakers last month passed a law allowing certain public corporations to restructure their debt by asking bondholders to take a loss. It’s part of a move to safeguard Puerto Rico’s ability to repay its general obligations and direct debt. Bonds of Puerto Rico and its agencies are tax-exempt nationwide.

Of the commonwealth securities the hedge-fund group holds, the “high majority” are general obligations, sales-tax bonds, Public Buildings Authority debt and Government Development Bank debt, Grote said. Those securities are exempt from the new debt-restructuring bill.

Puerto Rico plans to sell notes by Sept. 30 to refinance short-term maturities and generate cash, according to the GDB, which handles the commonwealth’s debt sales.

Lawmakers are also working on a plan that would enable the Infrastructure Financing Authority to sell as much as $2.2 billion of bonds backed by petroleum-tax revenue to repay loans to the GDB.

To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net; Mary Childs in New York at mchilds5@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Mark Schoifet

By Michelle Kaske and Mary Childs

Hedge-Fund Pool Supporting Puerto Rico Legislation Adds 14 Firms

Passive to a point: ETFs stray from index to sell Puerto Rico debt

(Reuters) - Puerto Rico's worsening debt crisis is pushing the managers of some municipal junk bond exchange-traded funds to ditch their mandate for passive management. Instead, they are straying far and wide from benchmark indexes as they try to avoid taking a hit on the island's bonds.

At least two passive ETFs, offered by Van Eck Global and State Street Global Advisors (SSgA), already have made moves to cut their exposure to Puerto Rico bonds to avoid being caught with debt that could be impaired or restructured, portfolio managers said.

Puerto Rico's weighting in some indexes, including the Barclays Custom High Yield Composite Index, has surged to nearly 30 percent from less than 5 percent at the start of the year, raising the dangers for funds that try to track one of the benchmarks. That has happened because more of the U.S. territory's debt qualified for inclusion in the indexes after it was slashed to junk by U.S. ratings agencies.

"There comes a point where our fiduciary responsibility to investors outweighs how we may follow an index," said Jim Colby, who oversees the $1.1 billion Market Vectors High Yield Municipal Index ETF (HYD.P) for Van Eck Global.

Fears about Puerto Rico's escalating fiscal woes underscore how passively run ETFs use a sampling approach to mimic the performance of an index. They're not obligated to own each of the thousands of constituents there are sometimes in an index, but instead can select the ones they want to track it, according to fund disclosures to investors about their management approach.

Colby said the ETF fund's management team at Van Eck has daily discussions about how to avoid a hammering if Puerto Rico misses a bond payment, for example. The fund had 4.3 percent of its assets in Puerto Rico debt at the end of June.

The fund seeks to replicate the price and yield performance of the Barclays Custom High Yield Composite Index, which tracks the junk municipal bond market with a 75 percent weighting in below-investment grade debt. The ETF is up just 8.6 percent so far this year, lagging the 10.29 percent advance of its benchmark, according to Thomson Reuters data.



PRICES REELING

Puerto Rico's chronic budget deficits have spooked the U.S. municipal bond market, and now fears of a massive restructuring of its debt have sent its bond prices reeling. The Caribbean island recently passed legislation that authorizes restructuring of some of its $73 billion in debt, which could hurt U.S. mutual funds and ETFs, the biggest holders of the bonds.

The government-controlled electric authority PREPA is the most likely candidate to restructure its debt under the new law.

At State Street's $262 million SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB.P), Puerto Rico bonds make up 5.39 percent of the fund, compared to an index exposure of 13 percent. That's a significant decline from the end of June, when Puerto Rico accounted for nearly 8 percent of the fund's net assets, according to fund disclosures.

Dave Mazza, head of research for ETFs at SSgA, the asset management arm of State Street (STT.N), said the fund tracks the S&P Municipal Yield Index, which has more than 30,000 constituents. But the ETF has chosen Puerto Rico bonds that are backstopped by insurance, showing how passive funds can sidestep risk.

"So even in regard to an index-tracking product, we have the flexibility to implement and move and position the portfolio away from certain areas that may be riskier than others," Mazza said.

Theoretically, he said the fund could have zero exposure to Puerto Rico if deemed to be appropriate and in the best interest of shareholders.

"Some investors presume that it’s a very simple, hands off approach, and that’s not the case at all," Mazza said.



(Reporting By Tim McLaughlin; Editing by Richard Valdmanis and Martin Howell)

BY TIM MCLAUGHLIN AND ASHLEY LAU

Passive to a point: ETFs stray from index to sell Puerto Rico debt

Looming Puerto Rico debt deadlines have investors nervous

Bond traders and ratings agencies are growing increasingly alarmed that the billions of dollars in debt incurred by Puerto Rico and its public corporations could go unpaid, after the commonwealth passed a measure in June that would allow entities to restructure debt.

Within the next 30 days, the Puerto Rico Electric Power Authority (PREPA) will have to pay back more than $650 million to two big banks. On July 31, a $145 million line of credit with Citibank comes due; on Aug. 14, PREPA must pay back a $525 million line of credit to a group of financial institutions headed by Scotia Bank.

Those loans would ordinarily be covered by Puerto Rico’s government. But a new law signed in June by Gov. Alejandro Garcia Padilla, of the Popular Democratic Party, would allow public corporations to restructure its debt — in effect, to default.  That has investors worried that billions of dollars in loans to the U.S. territory could become worthless. It also has some economists worried that Puerto Rico could lose access to the bond market, on which it relies to finance ongoing government operations.

Padilla proposed the new rules and the legislature passed them in a single day.

“There was no time for comment, no hearings, no nothing,” said Arturo Porzecanski, director of the International Economic Relations Program at American University’s School of International Service. “It was interpreted by many as a statement of unwillingness to stand by the legal commitments of the commonwealth.”

The public corporations that have incurred so much debt are a relic of the World War II era, when Gov. Rexford Tugwell, appointed by President Franklin D. Roosevelt, created the government-run companies to help Puerto Rico evolve from an agrarian society to an industrialized one. The corporations helped Puerto Rico’s economy evolve, but they didn’t evolve themselves: PREPA still generates about two-thirds of its power from oil, at an extraordinarily high cost. Power companies in the continental United States generate only about 1 percent of their power from oil.

Investors believe the Debt Enforcement and Recovery Act is a prelude to imminent action by PREPA and several other public corporations, which carry a combined $19.4 billion in outstanding bonds, according to Moody’s Investors Service. Any restructuring of that debt — which Moody’s and other ratings agencies see as a default — would cost bondholders money.

“Any restructuring that involves extension of maturities or reduces value of bonds is de facto default,” said Ted Hampton, a Puerto Rico analyst at Moody’s. “You’re not, as a bondholder, getting your principle and interest as you had anticipated.”

Soon after the Debt Enforcement and Recovery Act passed, OppenheimerFunds and Franklin Templeton Investments filed suit to stop the law. The firms, which hold more than $1 billion in PREPA bonds, said only Congress has the right to change bankruptcy laws. Moody’sdowngraded 16 types of Puerto Rico debt to below investment-grade levels, meaning the commonwealth must now pay much higher rates to borrow from investors.

Puerto Rico officials have moved to dismiss the suit [pdf], saying the Supreme Court has ruled that state and local governments can pass laws governing debt restructuring. In a statement, Secretary of Justice Cesar Miranda Rodriguez said the new law is “designed to protect the creditors’ collective interests through an orderly procedure for adjustment of a public corporation’s obligations while enabling it to continue providing critical services to Puerto Rico’s residents and businesses.”

Signs of economic depression are visible in Old San Juan, Puerto Rico on Nov. 19, 2013. (Nikki Kahn/The Washington Post)

Puerto Rico’s financial crisis has been mounting for years. Because of its status as a U.S. territory, the island of about 3.6 million residents doesn’t get the same level of financial support from the federal government. But the commonwealth’s government has tried to provide the same benefits every other U.S. citizen receives, levying a heavy cost on the state.

Puerto Rico’s government financed that spending through bonds; and while the commonwealth used bond money to build infrastructure in the 1990s, it began floating bonds to pay for recurring expenses beginning in 2000, a risky way to finance ongoing government operations. Today, the commonwealth carries more debt, an estimated $73 billion, than every U.S. state other than California and New York.

Still, Puerto Rican bonds remain enticing to investors because of their tax status. The commonwealth’s bonds are triple exempt from taxes — that is, owners of Puerto Rican bonds do not pay federal, state or local taxes on interest. Puerto Rican bonds can make up a third of tax-free municipal bond packages put together by big Wall Street investment firms.

But the future looks grim. PREPA’s revenue has declined precipitously in recent years as oil prices skyrocket and as residents leave for the U.S. mainland; about 100 Puerto Ricans move to the mainland every day. If the economy had rebounded as quickly in Puerto Rico as it had elsewhere, the power agency might have been able to grow its way out of debt.

The economic recession hit the island especially hard. Even before the recession, unemployment rates have been above 10 percent for more than a decade. It spiked to 16.5 percent in March and April 2011, and has fallen to 13.1 percent today, according to the Bureau of Labor Statistics.

Graffiti covers a vacant building in the Condado neighborhood of San Juan, Puerto Rico, on Nov. 19, 2013. (Nikki Kahn/The Washington Post)

Some economists compare Puerto Rico’s financial condition today with that of Southern European countries that have been forced to pursue bailouts over the last several years.

“The level of the recession in Puerto Rico is similar, perhaps greater than it was in Greece,” said Charles Blitzer, a former IMF official. “Unlike Greece, there is no easy way to get a bailout to make adjustment less painful for the Puerto Rican government and the Puerto Rican people. There is no IMF available. There is no E.U. bailout fund available.”

And thanks to a quirk in U.S. bankruptcy law, Puerto Rico and its public corporations don’t have the same protections as other governments. Cities like Detroit can file for Chapter 9 bankruptcy, so long as the filings are approved by the state of Michigan; the 1978 law that reformed the bankruptcy system didn’t cover governments not under state control — like Puerto Rico and the District of Columbia.

PREPA’s debts are only the most immediate concern investors face. In total, there are 17 agencies in Puerto Rico that issue bonds. The government owes $14 billion in general obligation bonds; PREPA owes $8.8 billion; the Government Development Bank owes $5.5 billion; and the state Sales Tax Financing Corporation owes another $6.3 billion.

Puerto Rico’s representative to Congress, Resident Commissioner Pedro Pierluisi, is urging Congress to change U.S. bankruptcy laws to allow the commonwealth’s government to authorize a public corporation — like PREPA — to file for bankruptcy. Pierluisi has spoken with House Judiciary Committee Chairman Bob Goodlatte (R-Va.), although election year atmospherics and the condensed congressional calendar make any change in the near future unlikely.

Sources familiar with the new Puerto Rico law, speaking on condition of anonymity to avoid angering either side, say the banks have few options. The law allows the government to ask for an extension of credit lines; without an extension, PREPA will default, and the banks risk being sent to the back of the line, behind other creditors.

And the government will feel pressure, too: Friday is Constitution Day, an annual holiday that serves as a de facto celebration of Padilla’s Popular Democratic Party. Unions representing government workers, including those at PREPA, have threatened to disrupt public rallies.

By Reid Wilson

Looming Puerto Rico debt deadlines have investors nervous

Puerto Rico Borrowing Measure Would Repay $2 Billion to GDB

Puerto Rico lawmakers are working on a plan to allow the island’s Infrastructure Financing Authority to sell as much as $2.2 billion of bonds backed by petroleum-tax revenue to repay loans to the Government Development Bank.

The bill would transfer revenue from tax increases implemented last year on petroleum products to theInfrastructure agency, called Prifa, from the Highways & Transportation Authority. Prifa, which has sold bonds backed by rum-tax revenue, would issue debt secured by the petroleum-tax receipts, General Assembly Representative Rafael “Tatito” Hernandez said in a telephone interview from the island.

Prifa would take on the loans the highway agency owes the GDB, and repay them with the bond proceeds. The Development Bank lends cash to the commonwealth and its agencies to help balance budgets. As the struggling island tries to revive its economy, repaying the GDB and increasing its available funds is a priority for the self-governing U.S. territory, Hernandez said.

“If we have a healthy GDB, then we have a healthy government,” said Hernandez, who chairs the island’s House Treasury Committee.

Safeguard Move

The bill is a proposal from Governor Alejandro Garcia Padilla, Hernandez said. It’s a move by Puerto Rico to safeguard its direct debt and strengthen the GDB’s balance sheet. The three largest rating companies cut Puerto Rico to junk in February. The commonwealth and its agencies owe $73 billion, making the island the third-largest municipal debtor, behind California and New York. Its bonds are tax-exempt nationwide.

The island’s economy has struggled to expand since 2006 and its population has declined for eight straight years as residents leave for the U.S. mainland, according to Census data.

The proposal would also help shield the GDB from a debt-restructuring law passed last month, which allows certain public corporations to reduce their obligations by negotiating with lenders, including the Development Bank.

The highway authority, which oversees most of the island’s roads and bridges, can still restructure its $4.6 billion of bonds under the law passed in June, although there are no plans to do so, the GDB said in a July 17 conference call with investors. Prifa, like the commonwealth’s general obligations and sales-tax bonds, is exempt from the debt-restructuring law, boosting the GDB’s chance of repayment.

Class Distinction

“It does appear that the intent of the bill is to isolate the GDB from the impact of any impairment on the Highways & Transportation Authority loan, which could threaten the bank’s solvency,” Robert Donahue, a managing director at Concord, Massachusetts-based Municipal Market Advisors, wrote in an e-mail. “Existing Highways & Transportation Authority bondholders should be concerned that the commonwealth has taken an action that appears to disadvantage one class over another.”

While investors holding highway bonds wouldn’t have access to the new petroleum revenue, the bigger stress to those securities is the highway agency’s ability to restructure its obligations, Horacio Aldrete, a Standard & Poor’s analyst, said in an interview. Prifa last sold bonds in 2010, according to the GDB.

“The main factor when it comes to the highway authority debt at this point is not as much the actual revenue flowing into the various funds for repayment, but the fact that there’s a likelihood that they could file or seek relief under the recently approved law,” Aldrete said.

New Credit

A bond sale backed by petroleum-tax revenue would be a new credit for the island. Moody’s Investors Service rates Prifa’s rum-tax bonds B3, six levels below investment grade. It grades the roadway authority one step lower at Caa1.

S&P rates the rum-tax bonds BB, two steps below investment grade. It rates the Highways & Transportation Authority three steps lower at B.

The bill revises a plan from last year to repay the Highways & Transportation Authority’s GDB loans. Lawmakers in 2013 increased the levy on petroleum products to $9.25 per barrel from $3 and transfered cigarette taxes to the roadway authority so it would be able to issue debt to repay the GDB.

The GDB is working with the highways authority to make the agency “financially self-sufficient” without using the debt-restructuring law, the bank said in an e-mailed statement.

Prices on Puerto Rico securities fell to record lows after the debt-restructuring law was proposed June 25. Since then, hedge funds and nontraditional buyers of munis have bought the debt, driving prices back to pre-June 25 levels.

Debt sold by the commonwealth and its agencies has earned 3.8 percent through July 23, down from a 10.7 percent year-to-date advance on May 30, according to S&P Dow Jones Indices. The entire municipal market has gained 6.4 percent this year.

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 atsmerelman@bloomberg.net Mark Tannenbaum, Alan Goldstein

By Michelle Kaske

Puerto Rico Borrowing Measure Would Repay $2 Billion to GDB

Puerto Rico bill would issue debt to repay $2 bln to GDB

(Reuters) - Pending legislation in Puerto Rico could protect the U.S. Commonwealth from getting burned in a potential restructuring of the Puerto Rico Highways & Transportation Authority (HTA), which owes the Government Development Bank over $2 billion.

Under the bill, quietly filed in late June near the end of the last legislative session with no public hearings, the island's infrastructure authority PRIFA would use tax revenue that goes to HTA to issue bonds and use the proceeds to pay off its debts with the GDB.

The bill has not yet been approved but the House and Senate finance committees issued reports calling for its passage and lawmakers are expected to approve the measure when they return to session next month.

"It is necessary to identify an entity that has better access to the market to assume the HTA's debt and in this way partially repay the debt to the GDB," GDB interim President Jose Pagan said in a memo that was filed with the bill.

It is unclear who would buy the debt. Puerto Rico has essentially lost access to capital markets since it passed a law in June that allows public corporations, such as HTA, to restructure their loans. The law led to a raft of downgrades from ratings agencies and a selloff in Puerto Rico's bonds.

However, a group of hedge funds who support the restructuring law, among them Fir Tree Partners and Monarch Alternative Capital, have said they would willing to provide Puerto Rico with financing. The group, known as the "Ad Hoc Group" did not immediately comment.

HTA has nearly $5 billion outstanding debt with bondholders beyond the $2 billion with the GDB.

Robert Donahue, managing director at Municipal Market Advisers, sees the move as an attempt to isolate "GDB's exposure to the Highway and Transportation Authority."

"The bill does not explicitly state the HTA will need to be restructured, but it does appear that it would isolate the GDB from the impact of HTA debt write down if the agency files for protection under the restructuring act," Donahue said. "It is unclear whether this legally is possible without violating bondholder covenants, and/or could be voided as an unlawful preferential transfer."

Puerto Rico officials insist that the law passed in June, known as the Puerto Rico Debt Enforcement and Recovery Act, is aimed at the electric power authority PREPA, which has over $9 billion of outstanding debt.

Still, news of the bill surprised investors just weeks after the Recovery Act was quickly passed. "There is a growing sentiment that Puerto Rico officials haven't acted in good faith and consistent with previous statements," said Donahue.

During an investor webcast earlier this month, a potential PRIFA bond deal was mentioned as a possible source of future financing. GDB Board Chairman David Chafey said Governor Alejandro Padilla has ordered the GDB and HTA to resolve its financial situation without resorting to the Recovery Act.

A spokesperson for the GDB did not immediately return requests for comment. (Reporting by Reuters in San Juan; Editing by Chizu Nomiyama)

Puerto Rico bill would issue debt to repay $2 bln to GDB

Hedge fund sues Puerto Rico government

Hedge fund BlueMountain Capital Management is suing the Puerto Rico government over debt avoidance law, reports CNBC's Kate Kelly.

Hedge fund sues Puerto Rico government

US hedge fund files suit against Puerto Rico gov

SAN JUAN, Puerto Rico (AP) — The government of Puerto Rico is now facing a second lawsuit in response to a new law that would allow certain public corporations in the U.S. territory to restructure their debt if needed.

U.S. hedge fund BlueMountain Capital Management, LLC says in a lawsuit filed Tuesday that the law is unconstitutional.

The company holds bonds issued by Puerto Rico's power company, which many believe will be the first to restructure its debt. The Electric Power Authority holds some $9 billion in debt.

The Templeton and Oppenheimer investment funds previously filed a similar lawsuit on June 28. The government has asked to have that lawsuit dismissed.

The law was approved as Puerto Rico seeks to emerge from a nearly decade-long economic slump and struggles with $73 billion in public debt.

US hedge fund files suit against Puerto Rico gov

Puerto Rico Default Risk Defied With Rally: Muni Credit

A potential restructuring of junk-rated Puerto Rico power bonds has failed to end the best rally in two years for the riskiest part of the $3.7 trillion municipal market.

With benchmark interest rates on city and state obligations close to the lowest in a generation, munis rated below investment grade are getting a boost from a 50 percent drop in issuance and the debt’s additional yield compared with corporate securities.

The shortage of high-yield bonds is overshadowing Puerto Rico’s move last month to allow some public corporations to cut their debt load by negotiating with investors. The junk-rated U.S. territory and its agencies have $73 billion of debt, giving them outsize influence on high-yield munis. The self-governing island of 3.6 million is the municipal market’s third-largest debtor, behindCalifornia and New York.

“There’s so little high-yield supply,” said Daniel Solender, who helps oversee $15.5 billion of munis atJersey City, New Jersey-based Lord Abbett & Co. “And the yields compared to other markets are still attractive too, so all of that could support it going forward.”

Power Candidate

The Puerto Rico Electric Power Authority, which supplies most of the island’s electricity, is the leading candidate to ask bondholders to take a loss under the new law, passed June 28. With $8.6 billion of debt, it would be the largest muni restructuring ever, surpassing the $8 billion of general obligations and water and sewer debt in Detroit’s historic bankruptcy filing. The Motor City has continued to pay its water and sewer debt, although the securities are considered distressed because of the bankruptcy.

Governor Alejandro Garcia Padilla, who took office in January 2013, proposed the debt-restructuring bill June 25, igniting losses in Puerto Rico and high-yield local-government debt. Munis rated below investment grade lost 1.7 percent in the week ending July 4, the worst performance in a year, according to S&P Dow Jones Indices.

Since then, the securities have rebounded, for an 8.5 percent advance in 2014 through July 21, the most since 2012, and beating the 6.2 percent gain in the broader market. Puerto Rico bonds, which are tax-exempt nationwide, have recovered to levels from before June 25.

Prepa Rebound

Uninsured Prepa bonds maturing in July 2026 traded yesterday at an average price of 46.74 cents on the dollar, the highest since June 24, data compiled by Bloomberg show. The debt traded as low as 36.68 cents July 2. Yesterday’s 14.95 percent yield was equivalent to a taxable rate of 24.75 percent for top earners.

High-yield securities are those rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s and Fitch Ratings.

Investors such as hedge funds and nontraditional buyers of munis took advantage of the cheapening in Puerto Rico, said Mark Paris, who helps manage the $6.8 billion Invesco High Yield Municipal Fund (ACTHX) in New York. The third-largest U.S. mutual fund focused on that segment of munis will close to new investors Aug. 1 because of the debt shortage.

Puerto Rico officials want to reduce the island’s debt load as the commonwealth’s economy struggles to grow. An index that tracks Puerto Rico’s economic activity has contracted 18 percent since 2005, according to the Government Development Bank, which handles the island’s debt sales. While the 13.1 percent jobless rate is the lowest in almost six years, it’s more than double the U.S. average.

Broader Impact

The fallout from Puerto Rico’s new debt law is also generating opportunities for traditional muni buyers, by increasing yields on some investment-grade and junk-rated munis beyond the commonwealth’s shores, said John Miller, co-head of fixed income in Chicago at Nuveen Asset Management, which oversees $92 billion of munis.

Tobacco bonds, transportation debt, health-care securities and land-backed bonds have cheapened since Puerto Rico lawmakers passed the bill, Miller said.

The municipal market is set to shrink in 2014 for the fourth consecutive year. States and cities have scheduled $6.6 billion of sales in the next 30 days, 21 percent below the three-year average, Bloomberg data show.

Sales of junk-rated debt have dropped to $990 million this year, from $2.1 billion in the same period of 2013. This year’s tally doesn’t include Puerto Rico’s $3.5 billion March general-obligation deal because it was targeted at hedge funds and other buyers of distressed debt.

Supply Driver

“People realize that there’s good opportunities still in the muni market,” Paris said. “There’s still not going to be a lot of supply this year.”

Investors have slowed their exodus from high-yield muni funds, yanking $59.5 million last week, after an outflow of $691 million the prior week, the most in a year, Lipper US Fund Flows data show.

Munis are also benefiting from gains in Treasuries and investors’ familiarity with the risks of owning Puerto Rico, Paris and Solender said. Yields on 30-year Treasuries set a 13-month-low this week.

“This is really about Puerto Rico,” Paris said. “A lot of people have already shied away from Puerto Rico, whether it be mutual funds or individual investors. This doesn’t have to be a big contagion to the rest of the muni market.”

Yields on junk-rated munis exceed those on speculative-grade corporate securities. The opposite is typically the case, Miller said. Junk munis maturing in about seven years yield 7.39 percent, or two percentage points more than comparably rated company debt, according to Barclays Plc data.

That relative value will help lower-rated munis, Miller said.

“That ratio is really very high and munis would typically yield less than high-yield corporates,” Miller said. “The tax advantage for our customer base is typically really strong too.”

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 atsmerelman@bloomberg.net Mark Tannenbaum, Pete Young

By Michelle Kaske

Puerto Rico Default Risk Defied With Rally: Muni Credit