Friday, August 07, 2015
NYC slams hedge funds over Puerto Rico's debt crisis, yet entrust them with pensions | Crain's New York Business
Melissa Mark-Viverito, New York City’s second-most-powerful elected official, called them vultures.
Hedge funds that hold billions of dollars of Puerto Rico’s high-yield debt "are feeding off the misery of the island," Ms. Mark-Viverito, speaker of the City Council, told a cheering crowd last week at a City Hall rally. She accused the funds of trying to gut wages, education and health care for the island’s 3.5 million residents.
What she and other critics who spoke that day didn’t say was that New York taxpayers and retirees entrust some of those hedge funds with more than $2.2 billion of the city’s $166 billion in pension assets.
The July 28 rally, organized by the city’s Hispanic Federation, attracted Latino activists who heard Ms. Mark-Viverito, Mayor Bill de Blasio and Comptroller Scott Stringer each acknowledge the special relationship between the island and New York, where more than 700,000 Puerto Ricans reside, almost twice as many as in San Juan.
No one suggested taking back the pension assets stashed with the firms.
Puerto Rico, with a credit rating that’s sunk as low as Greece’s, and its agencies have racked up $72 billion of debt, which Governor Alejandro Garcia Padilla says the island can no longer afford. Puerto Rico defaulted for the first time Monday, when it paid just $628,000 of a $58 million bond payment due from one of its agencies.
Big Buyers
As the yields on Puerto Rico bonds soared, hedge funds and other distressed-debt buyers swooped in. They now hold as much as 30% of the obligations of Puerto Rico and its agencies, Barclays Plc municipal-debt strategist Mikhail Foux estimates.
Critics of the hedge funds base their attack on a report commissioned by some of them. The analysis by three former International Monetary Fund economists, which was released last month, said Puerto Rico could avoid defaulting by cutting spending, improving tax collections and selling its ports and other real estate.
City pension funds for teachers, civil servants, police officers and firefighters have assets managed by Fir Tree Partners, Perry Capital, Brigade Capital Management, Centerbridge Partners, Marathon Asset Management, Angelo Gordon & Co. and D.E. Shaw & Co., according to disclosures by the retirement funds.
'Just ugly'
"They assumed a risk, they bought bonds at bottom dollar and so now it’s just ugly," said Ms. Mark-Viverito, 46, who was born and raised in San Juan and represents East Harlem.
The hedge funds "are not offering any recommendations about what they can do except being obstructionist in every which way," she said. "Investors need to share in the hardship to restore the island’s finances."
Mark-Viverito didn’t call for divestment of city pension assets from such funds, though she said in an interview that she would consider it. She doesn’t have direct power to do anything because, unlike the mayor and comptroller, the City Council doesn’t have representatives on union pension boards.
Mr. Stringer, who as comptroller acts as investment adviser to the pensions and has a representative on their boards, would be "exploring all options, including divestment," said his spokesman, Eric Sumberg.
Weighing returns
Amy Spitalnick, a de Blasio spokeswoman, said the administration would have to weigh the hedge funds’ impact on Puerto Rico’s fiscal constraints against the opportunity for positive returns on retiree investments.
"The administration is working with our fellow trustees to engage our investment managers and better understand their roles as it relates to the current situation in Puerto Rico and our pension investments," Ms. Spitalnick said. "It is imperative for trustees to understand the risks in their investment portfolios."
Mr. de Blasio’s speech at the City Hall rally focused on pushing Congress to pass a law allowing Puerto Rico’s agencies to declare bankruptcy, which would give them the ability to cut their debts in court.
Some investment firms that hold bonds sold by Puerto Rico’s electric utility have lobbied against the effort. Permitting such protection would erode investor confidence in the $3.6 trillion municipal-debt market, said Stephen Spencer, a managing director at Houlihan Lokey, who’s advising creditors of the power company. That’s because investors bought commonwealth securities with the assurance that they were protected against the risk of bankruptcy, he said.
Solution seen
Brigade and Fir Tree are part of the group of 38 funds that own $5.2 billion of Puerto Rico debt and commissioned the report from the former IMF economists. Spokesmen for the firms declined to comment.
The report drew from an analysis released by the Puerto Rican government in June, which said officials need to cut spending and take other steps to revive the economy, such as cutting the island’s minimum wage below the federal $7.25 level, easing job-security rules and reducing welfare benefits.
The critics who rallied at City Hall attacked some hedge funds for advocating such measures.
Like minds
As for bankruptcy, some hedge-fund managers holding general-obligation bonds, including Fir Tree, agree with Mr. de Blasio. They say changing the law would create a framework to help creditors get repaid. Before Mr. Garcia Padilla in June began a push to put off debt payments, they offered to assist with a $2.9 billion bond sale to raise cash for Puerto Rico, a deal that has since been scuttled.
Firms such as Marathon Asset Management, which hold bonds in Puerto Rico’s electric utility, known as Prepa, say that far from exploiting the situation, they hold the promise of helping the island recover without the need for bankruptcy. The firm is one of several creditors that hired lobbyists to kill the congressional proposal.
Angelo Gordon and D.E. Shaw are also working to defeat the bill. Spokesmen for each company declined to comment.
Utility bondholders want to negotiate directly with the agency.
The creditors proposed an $8.1 billion debt exchange that would stretch out payments over several years while giving the agency time and capital to upgrade its infrastructure. The new debt would be paid off through a surcharge imposed on the rate the utility charges its customers.
Hedge funds offer the island opportunity, not exploitation, said Andrew Rabinowitz, chief operating officer of Marathon.
"Marathon has a positive view towards Puerto Rico and is interested in investing new capital in the island to fund infrastructure projects which will provide jobs and power to the island as well as help to lower its energy prices," he said.
Photo: William Alatriste
Mayor Bill de Blasio and City Council Speaker Melissa Mark-Viverito criticized hedge funds for their lack of action in Puerto Rico's mounting debt crisis.
Melissa Mark-Viverito and Mayor Bill de Blasio spoke out against hedge funds, but neglected to mention that city taxpayers entrust some of them with their pensions.
NYC slams hedge funds over Puerto Rico's debt crisis, yet entrust them with pensions
Puerto Rico Has Another Debt Worry on Horizon
While Puerto Rico’s first bond default in its history reverberated through the financial markets on Tuesday, another move by the cash-poor island may provide a clue to where the next trouble spot lies.
After openly acknowledging on Monday afternoon that it had not made a $58 million bond payment, the government quietly disclosed in a financial filing later that afternoon that it had temporarily stopped making contributions of $92 million a month into a fund that is used to make payments on an additional $13 billion in bond debt. A small payment from the fund is due on Sept. 1.
Unlike the bond payments that went into default on Monday, the ones coming due are on general obligation bonds — the kind many investors have been led to believe would never go into default because the issuer’s full faith, credit and taxing authority stand behind them.
Puerto Rico issued such bonds over the years to raise money for a variety of government projects, and investors bought them eagerly because the island’s constitution explicitly guaranteed that such bonds would be paid.
The general obligation payment due to bondholders on Sept. 1 is for a mere $5 million, an amount so small that even if the redemption fund is empty at that point, Puerto Rico could still produce the cash right out of general revenue. It would presumably want to do so because of the constitutional requirement.
But a much bigger payment on the general obligation bonds, about $370 million, comes due on Jan. 1.
If Puerto Rico misses that one, “it would be an earthquake for the markets,” said Matt Fabian, a partner at Municipal Market Analytics, a financial research firm.
“Defaulting on the Public Finance Corporation bonds was a change in direction,” he said, referring to the government unit whose bonds have been in default since Monday. “Defaulting on the general obligation bonds would change the game entirely.”
Mr. Fabian said he doubted Puerto Rico would risk such a move.
Still, market participants trying to understand Puerto Rico’s overall negotiating strategy see that a pattern may be taking shape. Monday’s bond default was preceded by a missed payment into a similar pot of money, collected in advance to make scheduled payments on the Public Finance Corporation’s bonds.
It was not paid as scheduled on July 15 because it depended, in turn, on the Puerto Rico Legislature making an appropriation by the end of June, when the current budget was enacted. No appropriation was made, but the significance was not widely recognized at the time.
Two weeks later, when no prepayment was made, officials in Puerto Rico said it was still not tantamount to a default. But by the time the actual default took place, on Monday, active market participants were not surprised.
The Public Finance Corporation issues what is known as a moral obligation bond — a type of bond that gives investors little recourse in the event of a default, and the financial institutions that hold the debt still appeared to be assessing their options — including possible lawsuits over the default — on Tuesday. Puerto Rico bonds continued their long, steady decline on Tuesday.
Around the time the budget was being completed, something else happened that now seems portentous, even though few noticed it at the time: A 1976 law was amended, allowing Puerto Rico to stop making monthly prepayments on general obligation bonds. The suspension took effect in the 2016 fiscal year, which began on July 1.
When Mr. Fabian heard about the amendment he called it “most alarming” in a newsletter his firm publishes. True, the amendment meant only that Puerto Rico would stop putting the bond prepayments into something like an escrow account. But it also meant that when Jan. 1 rolls around, $370 million will be due to the general obligation bondholders and unless something changes in the meantime, the money will not be there.
Puerto Rican officials said the suspension was not a harbinger of anything and should not be cause for alarm.
“The suspension of these deposits does not imply a breach with the bondholders on the date of payment,” the government said in a statement when the amendment was passed.
The governor, Alejandro García Padilla, said late in June that the island’s debt was “unpayable,” and called for a “negotiated moratorium” on the debt, to give the island time and space to make big structural changes in its economy.
Since then, investors have been saying they want to help Puerto Rico, but they disagree that a debt moratorium is what the island needs. If any debt must go unpaid, they have suggested, let it be revenue bonds, which historically were considered less reliable than general obligation bonds anyway.
The bill now before Congress, to give Puerto Rico limited access to bankruptcy court, might produce that outcome. It would let Puerto Rico send a few of its big public enterprises, which issue revenue bonds, to be restructured in bankruptcy. The general obligation bonds would presumably be untouched.
But the bill has not progressed. Republicans and Democrats alike are deeply divided over whether to help Puerto Rico — and even how. In the meantime, plans for restructuring the island’s entire $72 billion debt are being devised by a working group established by the governor. The deadline for the plan is also Sept. 1.
A version of this article appears in print on August 5, 2015, on page B1 of the New York edition with the headline: Puerto Rico Has Another Debt Worry on Horizon. Order Reprints| Today's Paper|Subscribe
Alejandro García Padilla, governor of Puerto Rico, said in a televised speech in June that the island’s debt was “unpayable,” and called for a “negotiated moratorium” on the debt. Credit Joe Raedle/Getty Images
Puerto Rico Has Another Debt Worry on Horizon
After openly acknowledging on Monday afternoon that it had not made a $58 million bond payment, the government quietly disclosed in a financial filing later that afternoon that it had temporarily stopped making contributions of $92 million a month into a fund that is used to make payments on an additional $13 billion in bond debt. A small payment from the fund is due on Sept. 1.
Unlike the bond payments that went into default on Monday, the ones coming due are on general obligation bonds — the kind many investors have been led to believe would never go into default because the issuer’s full faith, credit and taxing authority stand behind them.
Puerto Rico issued such bonds over the years to raise money for a variety of government projects, and investors bought them eagerly because the island’s constitution explicitly guaranteed that such bonds would be paid.
The general obligation payment due to bondholders on Sept. 1 is for a mere $5 million, an amount so small that even if the redemption fund is empty at that point, Puerto Rico could still produce the cash right out of general revenue. It would presumably want to do so because of the constitutional requirement.
But a much bigger payment on the general obligation bonds, about $370 million, comes due on Jan. 1.
If Puerto Rico misses that one, “it would be an earthquake for the markets,” said Matt Fabian, a partner at Municipal Market Analytics, a financial research firm.
“Defaulting on the Public Finance Corporation bonds was a change in direction,” he said, referring to the government unit whose bonds have been in default since Monday. “Defaulting on the general obligation bonds would change the game entirely.”
Mr. Fabian said he doubted Puerto Rico would risk such a move.
Still, market participants trying to understand Puerto Rico’s overall negotiating strategy see that a pattern may be taking shape. Monday’s bond default was preceded by a missed payment into a similar pot of money, collected in advance to make scheduled payments on the Public Finance Corporation’s bonds.
It was not paid as scheduled on July 15 because it depended, in turn, on the Puerto Rico Legislature making an appropriation by the end of June, when the current budget was enacted. No appropriation was made, but the significance was not widely recognized at the time.
Two weeks later, when no prepayment was made, officials in Puerto Rico said it was still not tantamount to a default. But by the time the actual default took place, on Monday, active market participants were not surprised.
The Public Finance Corporation issues what is known as a moral obligation bond — a type of bond that gives investors little recourse in the event of a default, and the financial institutions that hold the debt still appeared to be assessing their options — including possible lawsuits over the default — on Tuesday. Puerto Rico bonds continued their long, steady decline on Tuesday.
Around the time the budget was being completed, something else happened that now seems portentous, even though few noticed it at the time: A 1976 law was amended, allowing Puerto Rico to stop making monthly prepayments on general obligation bonds. The suspension took effect in the 2016 fiscal year, which began on July 1.
When Mr. Fabian heard about the amendment he called it “most alarming” in a newsletter his firm publishes. True, the amendment meant only that Puerto Rico would stop putting the bond prepayments into something like an escrow account. But it also meant that when Jan. 1 rolls around, $370 million will be due to the general obligation bondholders and unless something changes in the meantime, the money will not be there.
Puerto Rican officials said the suspension was not a harbinger of anything and should not be cause for alarm.
“The suspension of these deposits does not imply a breach with the bondholders on the date of payment,” the government said in a statement when the amendment was passed.
The governor, Alejandro García Padilla, said late in June that the island’s debt was “unpayable,” and called for a “negotiated moratorium” on the debt, to give the island time and space to make big structural changes in its economy.
Since then, investors have been saying they want to help Puerto Rico, but they disagree that a debt moratorium is what the island needs. If any debt must go unpaid, they have suggested, let it be revenue bonds, which historically were considered less reliable than general obligation bonds anyway.
The bill now before Congress, to give Puerto Rico limited access to bankruptcy court, might produce that outcome. It would let Puerto Rico send a few of its big public enterprises, which issue revenue bonds, to be restructured in bankruptcy. The general obligation bonds would presumably be untouched.
But the bill has not progressed. Republicans and Democrats alike are deeply divided over whether to help Puerto Rico — and even how. In the meantime, plans for restructuring the island’s entire $72 billion debt are being devised by a working group established by the governor. The deadline for the plan is also Sept. 1.
A version of this article appears in print on August 5, 2015, on page B1 of the New York edition with the headline: Puerto Rico Has Another Debt Worry on Horizon. Order Reprints| Today's Paper|Subscribe
Puerto Rico Has Another Debt Worry on Horizon
Thursday, August 06, 2015
How Puerto Rico's Banks Avoided Disaster from Territory's Default
First Bancorp, OFG Bancorp and Popular Inc. have been trimming exposure to central government loans in recent years to limit their exposure to a financial crisis. Most still bank the island's municipalities, though they have strict underwriting and collateral to protect their interests
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How Puerto Rico's Banks Avoided Disaster from Territory's Default
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How Puerto Rico's Banks Avoided Disaster from Territory's Default
Moody's: Puerto Rico has defaulted
Puerto Rico's Government Development Bank announced Monday it was only able to make a partial payment on its Public Finance Corp. debt service due over the weekend.
In response, Moody's announced it viewed the nonpayment as a default, according to CNBC.
Among payments owed Aug. 1, Puerto Rico owed $58 million on Public Finance Corp. bonds.
"This event is consistent with our belief that Puerto Rico does not have the resources to make all of its forthcoming debt payments. This is a first in what we believe will be broad defaults on commonwealth debt," said Emily Raimes, vice president at Moody's Investors Service, in a statement.
Moody's: Puerto Rico has defaulted
In response, Moody's announced it viewed the nonpayment as a default, according to CNBC.
Among payments owed Aug. 1, Puerto Rico owed $58 million on Public Finance Corp. bonds.
"This event is consistent with our belief that Puerto Rico does not have the resources to make all of its forthcoming debt payments. This is a first in what we believe will be broad defaults on commonwealth debt," said Emily Raimes, vice president at Moody's Investors Service, in a statement.
Moody's: Puerto Rico has defaulted
Monday, August 03, 2015
Puerto Ricans Seek Economic Jumpstart
Aliyya Swaby Photo
Maldonado joined Connecticut’s Puerto Rican activists and U.S. Sen. Richard Blumenthal Friday afternoon at City Hall in calling on the federal government to enact policies to pull Puerto Rico out of its crisis and restructure its debt. The conference was one of several held across the nation to push President Barack Obama and Congress to action.
More than 250,000 Puerto Ricans live in Connecticut, according to the Hispanic Federation, which organized Friday’s conference.
“Puerto Rico is treated unfairly and unlike any other single entity in the United States of America,” he said Friday. And the crisis will have a “ripple effect” on the mainland, he said.
Ingrid Alvarez, president of the Hispanic Federation, said Obama should be held accountable to “infuse significant resources into the island’s economy,” in part by investing in clean energy development on the island and ordering the U.S. Navy to clean up Vieques and Culebra, used as military training ranges for years.
The island’s economic crisis is a direct result of policies made in Washington D.C., not San Juan, said Hartford State Rep. Edwin Vargas. “In many ways, Puerto Rico is a ward of the United States of America,” he said.
He said the economic “disaster doesn’t punish leadership,” but rather innocent citizens. “Some of those loans had a 20 percent interest rate. To me that’s usury,” Vargas said.
Luz Martinez is planning to return to Puerto Rico at the end of the month. She was born and raised there and came to Connecticut as an adult. Martinez will join her husband, who retired recently and has been living in Puerto Rico.
But she said many people she knows are making a reverse trip. Her niece, who has a college degree, can’t find a job in Puerto Rico and is planning to move to the mainland United States. Her friend recently moved to Puerto Rico and is now planning a move to Florida because she couldn’t “stand the water turned on and off every day,” Martinez said.
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Puerto Ricans Seek Economic Jumpstart
Puerto Rico must remake its finances - Opinion
What a difference a headline makes. Last week, as Treasury Secretary Jack Lew dismissed any talk of direct support for cash-strapped Puerto Rico, the Wall Street Journal politely announced, “Lew Says No to Federal Bailout.” Forty years ago, when President Gerald Ford made the same choice for a beleaguered and mismanaged New York City, the Daily News famously declared: “Ford to City: Drop Dead.”
Back then, the Big Apple narrowly avoided bankruptcy — although lawyers brought petitions before the Supreme Court just two weeks before Ford turned down the pleas from Mayor Abe Beam and Governor Hugh Carey. Puerto Rico may not be so lucky. Or, more accurately, the funds that own $72 billion in Puerto Rican debt may not be so lucky. Should the Commonwealth file for protection in the courts — much as Detroit did two years ago — investors stand to lose big. Still, the question remains: will Congress let them do it?
Unlike states, cities, and counties, the territory of Puerto Rico does not have access to Chapter 9 bankruptcy protection. Congress could change that with simple legislation, but the policy — and politics — behind such a move make navigating a path for the tiny island treacherous at best. Aside from presidential candidate Jeb Bush, no prominent Republicans have yet endorsed the idea.
Bankruptcy protection rewards bad behavior by allowing Puerto Rico to walk away from financial responsibilities without making real changes to the policies that created this fiscal disaster in the first place. Enacting bankruptcy laws now is also tantamount to changing the rules in mid-game. As an alternative, politicians and some investors are backing a financial control board not unlike the state-created Emergency Financial Control Board that held extraordinary power following New York City’s financial crisis.
In that regard, New York looks something like a model for reform. Disastrous mismanagement during the 1960s and ’70s spawned a generation of reform-minded leaders: Ed Koch, Rudolph Giuliani, and Michael Bloomberg. They changed the way New York did business in everything from financing to policing to public schools. Ironically, Bill DeBlasio, New York City’s current mayor, has moved the city sharply away from his predecessors’ reform agenda — and strongly supports federal assistance for Puerto Rico as well.
If all this sounds strangely Greek, it should. Like Puerto Rico, Greece’s lenders had no interest in default. They wanted to keep Greece in the Eurozone and extend payment terms in exchange for reforms to tax, pension, and labor laws. Equally important, they wanted to send the message to countries like Italy and Spain that there would be no easy way out from under their ever-expanding debts. In the end, creditors won, the Greek Parliament passed several packages of reform legislation, and the country’s debts have been restructured.
And that’s really the fundamental question for Congress. What approach will best ensure the badly needed reforms to Puerto Rico’s bureaucracy, public works, and pension laws?
Unlike states, cities, and counties, the territory of Puerto Rico does not have access to Chapter 9 bankruptcy protection.
And for Puerto Rico, the question is: how will it use this moment? If bankruptcy filing is simply seen as a way to avoid hard choices, it represents the wrong path for everyone. Under the crushing debt burden, Puerto Rico’s economy has contracted for eight consecutive years. Yet during that same time, while the number of students fell nearly 40 percent, the number of teachers went up. Such mismanagement would be comic if the consequences weren’t so tragic.
No one is telling anyone to drop dead here — in fact, Ford never actually used the words either. But reform, not bankruptcy, is the key to Puerto Rico’s economic future. If the island can’t get the job done, then Congress should create a financial control board that will do it for them.
John E. Sununu, a former Republican senator from New Hampshire, writes regularly for the Globe.
By John E. Sununu
Puerto Rico must remake its finances - Opinion
Back then, the Big Apple narrowly avoided bankruptcy — although lawyers brought petitions before the Supreme Court just two weeks before Ford turned down the pleas from Mayor Abe Beam and Governor Hugh Carey. Puerto Rico may not be so lucky. Or, more accurately, the funds that own $72 billion in Puerto Rican debt may not be so lucky. Should the Commonwealth file for protection in the courts — much as Detroit did two years ago — investors stand to lose big. Still, the question remains: will Congress let them do it?
Unlike states, cities, and counties, the territory of Puerto Rico does not have access to Chapter 9 bankruptcy protection. Congress could change that with simple legislation, but the policy — and politics — behind such a move make navigating a path for the tiny island treacherous at best. Aside from presidential candidate Jeb Bush, no prominent Republicans have yet endorsed the idea.
Bankruptcy protection rewards bad behavior by allowing Puerto Rico to walk away from financial responsibilities without making real changes to the policies that created this fiscal disaster in the first place. Enacting bankruptcy laws now is also tantamount to changing the rules in mid-game. As an alternative, politicians and some investors are backing a financial control board not unlike the state-created Emergency Financial Control Board that held extraordinary power following New York City’s financial crisis.
In that regard, New York looks something like a model for reform. Disastrous mismanagement during the 1960s and ’70s spawned a generation of reform-minded leaders: Ed Koch, Rudolph Giuliani, and Michael Bloomberg. They changed the way New York did business in everything from financing to policing to public schools. Ironically, Bill DeBlasio, New York City’s current mayor, has moved the city sharply away from his predecessors’ reform agenda — and strongly supports federal assistance for Puerto Rico as well.
If all this sounds strangely Greek, it should. Like Puerto Rico, Greece’s lenders had no interest in default. They wanted to keep Greece in the Eurozone and extend payment terms in exchange for reforms to tax, pension, and labor laws. Equally important, they wanted to send the message to countries like Italy and Spain that there would be no easy way out from under their ever-expanding debts. In the end, creditors won, the Greek Parliament passed several packages of reform legislation, and the country’s debts have been restructured.
And that’s really the fundamental question for Congress. What approach will best ensure the badly needed reforms to Puerto Rico’s bureaucracy, public works, and pension laws?
Unlike states, cities, and counties, the territory of Puerto Rico does not have access to Chapter 9 bankruptcy protection.
And for Puerto Rico, the question is: how will it use this moment? If bankruptcy filing is simply seen as a way to avoid hard choices, it represents the wrong path for everyone. Under the crushing debt burden, Puerto Rico’s economy has contracted for eight consecutive years. Yet during that same time, while the number of students fell nearly 40 percent, the number of teachers went up. Such mismanagement would be comic if the consequences weren’t so tragic.
No one is telling anyone to drop dead here — in fact, Ford never actually used the words either. But reform, not bankruptcy, is the key to Puerto Rico’s economic future. If the island can’t get the job done, then Congress should create a financial control board that will do it for them.
John E. Sununu, a former Republican senator from New Hampshire, writes regularly for the Globe.
AP
The US and Puerto Rican flags flew in Old San Juan.
By John E. Sununu
Puerto Rico must remake its finances - Opinion
Misery deepens for those in Puerto Rico who can't leave
SAN JUAN, Puerto Rico (AP) — Most tables are empty at Walter Martin's coffee shop in San Juan's colonial district. His brow is furrowed with concern and glistens with sweat in the sweltering Caribbean morning.
He's turned off the air conditioning to lower his power bill. With fewer customers, he's cut staff hours and tried to make up the lost income by raising some prices. But Puerto Rico's entrenched economic crisis is leading people to either cut their personal spending to the basics or flee to the mainland to search for jobs, contributing to the struggles of those left on the island.
"We're making every single adjustment needed," Martin said. "We have to make these decisions because if not..."
He trailed off, hesitant to complete the sentence.
Nearly 10 years into a deep economic slump, Puerto Rico is no closer to pulling out, and, in fact, is poised to plummet further. The unemployment rate is above 12 percent. Some 144,000 people left the U.S. territory between 2010 and 2013, and about a third of all people born in Puerto Rico now live in the U.S. mainland. Schools and businesses have closed amid the exodus. The population of 3.5 million is expected to drop to 3 million by 2050.
The government has tried to boost revenue by hiking the sales tax to 11.5 percent, higher than any U.S. state, and closing government offices. Its debt-burdened power utility already charges rates that on average are twice those of the mainland, and is under pressure from bondholders to raise them higher.
A $58 million bond payment due Saturday went unpaid. If defaults continue, analysts say Puerto Rico will face numerous lawsuits and increasingly limited access to markets, putting a recovery even more out of reach.
Carmen Davila, a 65-year-old retired truck driver and window dresser, recently withdrew her money from the bank amid fears the government would shut down and seize it.
"Things are happening in Puerto Rico that we've never seen before," Davila said. "Puerto Rico has always had its ups and downs, but you could handle it. This now is serious."
The exodus of people from the island, mainly to central Florida and New York, is palpable. Nearly everyone knows someone who has left, or plans to do so soon. The impact of the departures, and the decline in spending of those remaining, is obvious.
Crowds have thinned at restaurants and movie theaters; families like Davila's have cut back on summer excursions to beaches and mountains; and even San Juan's notorious traffic jams have dwindled somewhat.
Jose Hernandez said his commute into San Juan's colonial district, once about two hours, now takes roughly 20 minutes.
The 62-year-old lottery vendor would join the departure, too, if not for the grandchildren he helps support — even though he recognizes doing so would only add to the trouble.
"Fewer people means there are less of us to help boost the economy," he said. "This is the worst I've seen it. ... There are no people on the street. They've disappeared."
His lottery business has fallen by nearly 10 percent, forcing him to keep grocery shopping to the basics and to cut back on luxuries such as movies and restaurants.
"What you used to do three or four times a month, now you only do once," he said. "You cut out a lot of things."
Davila said her monthly $600 Social Security payment isn't enough to cover expenses. She and other relatives are pooling their money to buy back-to-school supplies for her 12 grandchildren. She cares for them while her own children work and study, but she yearns to move back to New York.
"We don't have money to live," she said.
A list of cost-cutting measures proposed by a group of hedge funds that holds $5.2 billion of Puerto Rico's debt has riled islanders: laying off teachers; cutting Medicaid benefits; and reducing subsidies to the main public university.
By DANICA COTO
Misery deepens for those in Puerto Rico who can't leave
He's turned off the air conditioning to lower his power bill. With fewer customers, he's cut staff hours and tried to make up the lost income by raising some prices. But Puerto Rico's entrenched economic crisis is leading people to either cut their personal spending to the basics or flee to the mainland to search for jobs, contributing to the struggles of those left on the island.
"We're making every single adjustment needed," Martin said. "We have to make these decisions because if not..."
He trailed off, hesitant to complete the sentence.
Nearly 10 years into a deep economic slump, Puerto Rico is no closer to pulling out, and, in fact, is poised to plummet further. The unemployment rate is above 12 percent. Some 144,000 people left the U.S. territory between 2010 and 2013, and about a third of all people born in Puerto Rico now live in the U.S. mainland. Schools and businesses have closed amid the exodus. The population of 3.5 million is expected to drop to 3 million by 2050.
The government has tried to boost revenue by hiking the sales tax to 11.5 percent, higher than any U.S. state, and closing government offices. Its debt-burdened power utility already charges rates that on average are twice those of the mainland, and is under pressure from bondholders to raise them higher.
A $58 million bond payment due Saturday went unpaid. If defaults continue, analysts say Puerto Rico will face numerous lawsuits and increasingly limited access to markets, putting a recovery even more out of reach.
Carmen Davila, a 65-year-old retired truck driver and window dresser, recently withdrew her money from the bank amid fears the government would shut down and seize it.
"Things are happening in Puerto Rico that we've never seen before," Davila said. "Puerto Rico has always had its ups and downs, but you could handle it. This now is serious."
The exodus of people from the island, mainly to central Florida and New York, is palpable. Nearly everyone knows someone who has left, or plans to do so soon. The impact of the departures, and the decline in spending of those remaining, is obvious.
Crowds have thinned at restaurants and movie theaters; families like Davila's have cut back on summer excursions to beaches and mountains; and even San Juan's notorious traffic jams have dwindled somewhat.
Jose Hernandez said his commute into San Juan's colonial district, once about two hours, now takes roughly 20 minutes.
The 62-year-old lottery vendor would join the departure, too, if not for the grandchildren he helps support — even though he recognizes doing so would only add to the trouble.
"Fewer people means there are less of us to help boost the economy," he said. "This is the worst I've seen it. ... There are no people on the street. They've disappeared."
His lottery business has fallen by nearly 10 percent, forcing him to keep grocery shopping to the basics and to cut back on luxuries such as movies and restaurants.
"What you used to do three or four times a month, now you only do once," he said. "You cut out a lot of things."
Davila said her monthly $600 Social Security payment isn't enough to cover expenses. She and other relatives are pooling their money to buy back-to-school supplies for her 12 grandchildren. She cares for them while her own children work and study, but she yearns to move back to New York.
"We don't have money to live," she said.
A list of cost-cutting measures proposed by a group of hedge funds that holds $5.2 billion of Puerto Rico's debt has riled islanders: laying off teachers; cutting Medicaid benefits; and reducing subsidies to the main public university.
By DANICA COTO
In this Wednesday, July 29, 2015 photo, the Puerto Rican flag flies in front of Puerto Rico’s Capitol as in San Juan, Puerto Rico. Nearly 10 years into a deep economic slump, Puerto Rico is no closer to pulling out, and, in fact, is poised to plummet further. The unemployment rate is above 12 percent and tens of thousands have migrated out of the island. (AP Photo/Ricardo Arduengo)
Misery deepens for those in Puerto Rico who can't leave
Puerto Ricans Brace for Crisis in Health Care
MAYAGÜEZ, P.R. — The first visible sign that the health care system in Puerto Rico was seriously in trouble was when a steady stream of doctors — more than 3,000 in five years — began to leave the island for more lucrative, less stressful jobs on the mainland.
Now, as Puerto Rico faces another hefty cut to a popular Medicare program and grapples with an alarming shortage of Medicaid funds, its health care system is headed for an all-out crisis, which could further undermine the island’s gutted economy.
On an island where more than 60 percent of residents receive Medicare or Medicaid — an indicator of Puerto Rico’s poverty and rapidly aging population — the dwindling funds have set off outpourings of concern among patients and doctors, protest rallies and intense lobbying in Washington.
And while the crisis is playing out most vividly today, its cause dates back decades and stems, in large part, from a vast disparity in federal funding for health care on the island compared with the 50 states. This disparity is partly responsible for $25 billion of Puerto Rico’s $73 billion debt, as its government was forced to borrow over time to keep the Medicaid program afloat, according to economists.
“These are a cascade of cuts that will have disastrous, gigantic implications,” said Dennis Rivera, the chairman of the Puerto Rico Healthcare Crisis Coalition, a group of doctors, hospitals, health care advocates, unions and insurance companies lobbying the Obama administration and Congress. “Health care in Puerto Rico is headed for a collapse.”
He added, “If we pay the same Medicare taxes and Social Security taxes, we should be treated equally.”
In January, the federal government is supposed to cut payments to Medicare Advantage plans in Puerto Rico by 11 percent. The plans, offered by private companies, are a popular alternative to Medicare, often providing extra benefits and accessibility.
Three-quarters of the Medicare population on the island is enrolled in Advantage, and patients, many of them poor and chronically ill, worry about the impact of the cuts on costs and benefits.
The cuts are expected to lead to higher co-pays for medication and hospitalization, among other things, said Dr. Richard Shinto, the president and chief executive of InnovaCare, an insurance company with three Advantage plans in Puerto Rico.
“There will also be certain services we might have provided in the past that we can’t now,” Dr. Shinto said. Free rides to doctor’s offices are an example.
In addition, several hundred doctors are already losing their contracts with major managed care companies. InnovaCare has terminated 200 contracts, Dr. Shinto said.
“That’s one way on the island we are trying to manage the significant revenue reductions we’re to have — narrow our network of physicians,” he added.
This is in part because of how doctors practice here; they tend to be in solo practices, making it difficult to meet all requirements. Lower funding levels also complicated efforts to meet standards.
The island’s Medicaid program — called Mi Salud, or My Health — serves nearly 1.6 million people, or 45 percent of the island’s population, the largest share in the United States, and it is also struggling, said Ricardo Rivera, the executive director of the Puerto Rico Health Insurance Administration, which carries out the Medicaid program.
Health care makes up 20 percent of the Puerto Rican economy, which has been in a slow decline as manufacturing jobs have disappeared and the government has borrowed more than it could pay back. Because of the island’s precarious finances, the Medicaid program lacks access to credit and is so short on cash that it owes providers $200 million, a figure it has whittled down from $350 million. It is also spending a one-time $6.4 billion federal grant at a much faster pace than expected, Mr. Rivera said.
The Medicaid program, which relies on both federal and commonwealth funds, could run out of the grant money as early as the end of 2016, three years earlier than anticipated, Mr. Rivera said. This could mean that 900,000 people will have to be dropped from the program.
Puerto Rico cannot use the federal health insurance exchange under the Affordable Care Act, and it chose not to create its own exchange because its citizens do not pay federal income taxes and thus are not eligible for the subsidies that make exchange plans more affordable.
A spokesman for the Centers for Medicare and Medicaid Services said the agency was aware of the growing concerns and was working weekly with a group of politicians, health care officials, advocates and insurance companies here to find solutions. So far, none have been offered.
The reduction in Medicare Advantage funding is meant to bring federal payments for that program more in line with traditional Medicare fee-for-service rates in Puerto Rico. Advantage plans on the mainland have received cuts in recent years for the same reason, although generally not as big.
But Puerto Rican officials and health care experts have long criticized the federal formula for calculating its fee-for-service rates as unfair, and point out that even the Virgin Islands, a much smaller commonwealth, gets considerably more money for Advantage.
Puerto Rican lawmakers and doctors warn that it will be more expensive for the United States to ignore the problem for one reason: Those who need medical care can quickly settle with relatives on the mainland, where it is pricier.
Puerto Ricans Brace for Crisis in Health Care
Saturday, August 01, 2015
Puerto Rico says it will not make $58m bond payment due Saturday
Puerto Rico’s government said on Friday it would not make a $58m bond payment due on the weekend and warned that the general fund would run out of liquidity by November if no action is taken.
Gubernatorial chief of staff Victor Suarez said at a news conference that the island’s Public Finance Corporation could not meet the payment which was due on Saturday.
“We don’t have the money,” he said, adding that the government still hopes to reach an agreement with creditors on renegotiating its debts.
Governor Alejandro Garcia Padilla warned several weeks ago that the government and state agencies could not repay the $72bn in public debt that hangs over the US territory, which is struggling with a nearly decade-long economic slump.
Puerto Rican officials contend that failure to make Saturday’s payment would not constitute a default because it involves moral obligation bonds, which means there is no legal requirement to repay them. But economists reject that argument.
“It is a default no matter how they try to disguise it,” said Sergio Marxuach, policy director at the Center for the New Economy, a Puerto Rico-based think tank.
Marxuach and other economists said bondholders could file a lawsuit as soon as next week as a result of the nonpayment, which they said would be the first default in the history of the US territory.
Justice secretary Cesar Miranda said his department had been preparing for such a scenario. “Obviously we have been anticipating lawsuits,” he said.
US open-end bond mutual funds together own more than $11.4bn of Puerto Rico bonds, or just over 15% of its outstanding debt, according to a Morningstar report. Hedge funds hold roughly one-third of Puerto Rico’s debt. But experts have said they do not expect Puerto Rico’s problems to have a spillover effect on the broader municipal market.
Ben Eiler, a US bond trader who lives in Puerto Rico, owns bonds held by the Public Financing Corporation but said he was not surprised by the government’s actions.
“Everyone in the world believes they’re going to default,” he said in a phone interview. “I anticipated that.” Eiler said he expects the bond’s price to rise after a restructuring is worked out.
A group formed by the government to initiate debt renegotiation discussions and submit a five-year fiscal reform plan by 30 August has been meeting regularly, Suarez said. He said that so far, they have studied 59 proposals to boost Puerto Rico’s economy, including welfare and labor reforms and public-private partnerships.
Suarez said the group also received information about the general fund’s liquidity.
“If we don’t take any action, we’ll be in the red by November,” he said.
Puerto Rico’s Government Development Bank, which oversees the island’s debt transactions, also is struggling with liquidity. However, bank president Melba Acosta said in a statement that the institution would meet a $169m bond payment due on Friday.
Garcia’s administration has pushed for the right for Puerto Rico’s public agencies to file for bankruptcy under Chapter 9, but the proposal has not drawn any Republican co-sponsors in the US Congress. The White House has said that no federal bailout is planned.
People walk past a closed store in San Juan, Puerto Rico. Photograph: Alvin Baez/Reuters
Economists see first default in territory’s history but officials disagree
Government fears key fund could run out of liquidity by November
Puerto Rico says it will not make $58m bond payment due Saturday
Gubernatorial chief of staff Victor Suarez said at a news conference that the island’s Public Finance Corporation could not meet the payment which was due on Saturday.
“We don’t have the money,” he said, adding that the government still hopes to reach an agreement with creditors on renegotiating its debts.
Governor Alejandro Garcia Padilla warned several weeks ago that the government and state agencies could not repay the $72bn in public debt that hangs over the US territory, which is struggling with a nearly decade-long economic slump.
Puerto Rican officials contend that failure to make Saturday’s payment would not constitute a default because it involves moral obligation bonds, which means there is no legal requirement to repay them. But economists reject that argument.
“It is a default no matter how they try to disguise it,” said Sergio Marxuach, policy director at the Center for the New Economy, a Puerto Rico-based think tank.
Marxuach and other economists said bondholders could file a lawsuit as soon as next week as a result of the nonpayment, which they said would be the first default in the history of the US territory.
Justice secretary Cesar Miranda said his department had been preparing for such a scenario. “Obviously we have been anticipating lawsuits,” he said.
US open-end bond mutual funds together own more than $11.4bn of Puerto Rico bonds, or just over 15% of its outstanding debt, according to a Morningstar report. Hedge funds hold roughly one-third of Puerto Rico’s debt. But experts have said they do not expect Puerto Rico’s problems to have a spillover effect on the broader municipal market.
Ben Eiler, a US bond trader who lives in Puerto Rico, owns bonds held by the Public Financing Corporation but said he was not surprised by the government’s actions.
“Everyone in the world believes they’re going to default,” he said in a phone interview. “I anticipated that.” Eiler said he expects the bond’s price to rise after a restructuring is worked out.
A group formed by the government to initiate debt renegotiation discussions and submit a five-year fiscal reform plan by 30 August has been meeting regularly, Suarez said. He said that so far, they have studied 59 proposals to boost Puerto Rico’s economy, including welfare and labor reforms and public-private partnerships.
Suarez said the group also received information about the general fund’s liquidity.
“If we don’t take any action, we’ll be in the red by November,” he said.
Puerto Rico’s Government Development Bank, which oversees the island’s debt transactions, also is struggling with liquidity. However, bank president Melba Acosta said in a statement that the institution would meet a $169m bond payment due on Friday.
Garcia’s administration has pushed for the right for Puerto Rico’s public agencies to file for bankruptcy under Chapter 9, but the proposal has not drawn any Republican co-sponsors in the US Congress. The White House has said that no federal bailout is planned.
Puerto Rico says it will not make $58m bond payment due Saturday
Puerto Rico Veers Toward First Bond Default: Questions Answered
Puerto Rico Governor Alejandro Garcia Padilla wants to negotiate with investors to reduce $72 billion of debt he says the island can’t afford.
The U.S. commonwealth has paid bondholders what they’re owed since it was ceded to the U.S. following the Spanish-American War. That may soon change.
Puerto Rico’s Public Finance Corp., which has sold $1 billion of debt, is likely to miss a $58 million payment due on Aug. 1. The bonds are repaid with appropriations allocated by the legislature. Faced with a budget shortfall, lawmakers didn’t provide enough money to service the debt.
While the securities are a small share of the island’s debt costs, failing to pay would be a warning shot to investors that officials aren’t afraid to default.
Here are some of the questions you may have, starting right at the very beginning:
Q: What is a default?
A: Investopedia.com defines default as “the failure to promptly pay interest or principal when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment.” Moody’s Investors Service says a missed payment is a default.
Q: What is the Public Finance Corp.?
A: It’s a subsidiary of the Government Development Bank, which works on the island’s debt sales. It was created in 1984 to sell bonds on behalf of the commonwealth and its agencies. Most of the proceeds it has raised were used to balance Puerto Rico’s budget.
Q: Is a default definite?
A: While officials haven’t said for certain whether they’ll pay the interest and principal bill, it’s likely they won’t.
No money was transfered to the trustee in July to make the payment, and Victor Suarez, Garcia Padilla’s chief of staff, said on July 27 that the island doesn’t have the cash.
Investors appear to view a default as near certain: PFC bonds maturing in 2031 traded on July 30 for 16 cents on the dollar.
Q: What happens if the PFC fails to pay?
A: Bondholders could sue, but they have few remedies. The legislature isn’t legally required to allocate the money. The commonwealth hasn’t guaranteed repayment and the PFC has no power over taxes to raise funds on its own. Nor are bondholders able to demand early repayment in the event of a default.
The PFC has until the end of business on Aug. 3 to make the payment because the first day of August is a Saturday.
Q: What does a default mean for holders of other Puerto Rico bonds?
Analysts and investors say it may cause Puerto Rico securities to lose value by casting doubt on the government’s willingness to pay its other debts. An index of Puerto Rico securities slid this week to a six-year low.
Q: Why won’t Puerto Rico just find the money, given that it’s not expected to default on other debt payments due the same day?
A: Commonwealth officials say the island’s available cash is limited. It’s delayed tax refunds, suspended payments to some suppliers and borrowed from its insurance agencies to help preserve cash to continue making payroll and support essential government services.
The PFC bonds have the weakest legal protections, so the island will suffer fewer pitfalls from a default on those bonds.
Q: Which firms are set to receive interest payments on Aug. 1?
A: OppenheimerFunds Inc., Franklin Resources Inc. and Nuveen Asset Management are among those that held PFC bonds as of June 30.
Q: What is the federal government doing in response to Puerto Rico’s debt crisis?
A: Treasury Secretary Jacob J. Lew said July 29 that there isn’t any discussion of a federal bailout. Lew, the White House and the Federal Reserve have urged Congress to work with commonwealth officials. Bills to allow some Puerto Rico agencies to file for Chapter 9 bankruptcy, introduced in both chambers, haven’t advanced so far because of a lack of support from Republican leaders.
Q: Why can’t Puerto Rico turn to U.S. bankruptcy court to lower its debts, as Detroit and other municipalities have?
A: Like U.S. states, Puerto Rico’s central government isn’t eligible for Chapter 9 bankruptcy protection, nor would it be under the legislation proposed in Congress. However, the bankruptcy code never gave Puerto Rico that option for its agencies or publicly run corporations, either.
Q: How much debt does Puerto Rico have?
A: Puerto Rico and its agencies owe a combined $72 billion. That includes $13 billion of general-obligation debt, which Puerto Rico’s constitution says must be repaid before other expenses, and another $5.5 billion guaranteed by the commonwealth.
There is also $15 billion of debt payable from island sales taxes. Other agencies, such as the Puerto Rico Electric Power Authority, the government power company, have also sold bonds.
Q: Who holds Puerto Rico’s debt?
A: Hedge funds hold almost $22 billion, while local investors on the island have about $20 billion. More than half of U.S. mutual funds that focus on municipal securities have exposure to Puerto Rico debt, for a combined $10 billion.
Q: Why can’t Puerto Rico and its localities repay the entire $72 billion?
A: The commonwealth and its agencies have borrowed for years to paper over budget shortfalls, with the expectation that the economy would improve and the need to keep relying on debt would disappear. It didn’t. Puerto Rico’s economy has declined every year but one since 2006 and, with a population exodus for the U.S. mainland, there’s fewer people around to pay taxes needed to finance the debt.
At the same time, health care and retirement expenses are projected to increase. Its employee-retirement system is also deeply underfunded.
Q: What is Puerto Rico doing now?
A: Island officials are working on a debt-restructuring plan, to be finished by Sept. 1, and a five-year fiscal plan to improve the economy and balance the budget. Officials have said it’s premature to say by how much it will seek to reduce its debt and which securities could be affected.
Michelle Kaske
Puerto Rico Veers Toward First Bond Default: Questions Answered
The U.S. commonwealth has paid bondholders what they’re owed since it was ceded to the U.S. following the Spanish-American War. That may soon change.
Puerto Rico’s Public Finance Corp., which has sold $1 billion of debt, is likely to miss a $58 million payment due on Aug. 1. The bonds are repaid with appropriations allocated by the legislature. Faced with a budget shortfall, lawmakers didn’t provide enough money to service the debt.
Here are some of the questions you may have, starting right at the very beginning:
Q: What is a default?
A: Investopedia.com defines default as “the failure to promptly pay interest or principal when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment.” Moody’s Investors Service says a missed payment is a default.
Q: What is the Public Finance Corp.?
A: It’s a subsidiary of the Government Development Bank, which works on the island’s debt sales. It was created in 1984 to sell bonds on behalf of the commonwealth and its agencies. Most of the proceeds it has raised were used to balance Puerto Rico’s budget.
Q: Is a default definite?
A: While officials haven’t said for certain whether they’ll pay the interest and principal bill, it’s likely they won’t.
No money was transfered to the trustee in July to make the payment, and Victor Suarez, Garcia Padilla’s chief of staff, said on July 27 that the island doesn’t have the cash.
Investors appear to view a default as near certain: PFC bonds maturing in 2031 traded on July 30 for 16 cents on the dollar.
Q: What happens if the PFC fails to pay?
A: Bondholders could sue, but they have few remedies. The legislature isn’t legally required to allocate the money. The commonwealth hasn’t guaranteed repayment and the PFC has no power over taxes to raise funds on its own. Nor are bondholders able to demand early repayment in the event of a default.
The PFC has until the end of business on Aug. 3 to make the payment because the first day of August is a Saturday.
Q: What does a default mean for holders of other Puerto Rico bonds?
Analysts and investors say it may cause Puerto Rico securities to lose value by casting doubt on the government’s willingness to pay its other debts. An index of Puerto Rico securities slid this week to a six-year low.
Q: Why won’t Puerto Rico just find the money, given that it’s not expected to default on other debt payments due the same day?
A: Commonwealth officials say the island’s available cash is limited. It’s delayed tax refunds, suspended payments to some suppliers and borrowed from its insurance agencies to help preserve cash to continue making payroll and support essential government services.
The PFC bonds have the weakest legal protections, so the island will suffer fewer pitfalls from a default on those bonds.
Q: Which firms are set to receive interest payments on Aug. 1?
A: OppenheimerFunds Inc., Franklin Resources Inc. and Nuveen Asset Management are among those that held PFC bonds as of June 30.
Q: What is the federal government doing in response to Puerto Rico’s debt crisis?
A: Treasury Secretary Jacob J. Lew said July 29 that there isn’t any discussion of a federal bailout. Lew, the White House and the Federal Reserve have urged Congress to work with commonwealth officials. Bills to allow some Puerto Rico agencies to file for Chapter 9 bankruptcy, introduced in both chambers, haven’t advanced so far because of a lack of support from Republican leaders.
Q: Why can’t Puerto Rico turn to U.S. bankruptcy court to lower its debts, as Detroit and other municipalities have?
A: Like U.S. states, Puerto Rico’s central government isn’t eligible for Chapter 9 bankruptcy protection, nor would it be under the legislation proposed in Congress. However, the bankruptcy code never gave Puerto Rico that option for its agencies or publicly run corporations, either.
Q: How much debt does Puerto Rico have?
A: Puerto Rico and its agencies owe a combined $72 billion. That includes $13 billion of general-obligation debt, which Puerto Rico’s constitution says must be repaid before other expenses, and another $5.5 billion guaranteed by the commonwealth.
There is also $15 billion of debt payable from island sales taxes. Other agencies, such as the Puerto Rico Electric Power Authority, the government power company, have also sold bonds.
Q: Who holds Puerto Rico’s debt?
A: Hedge funds hold almost $22 billion, while local investors on the island have about $20 billion. More than half of U.S. mutual funds that focus on municipal securities have exposure to Puerto Rico debt, for a combined $10 billion.
Q: Why can’t Puerto Rico and its localities repay the entire $72 billion?
A: The commonwealth and its agencies have borrowed for years to paper over budget shortfalls, with the expectation that the economy would improve and the need to keep relying on debt would disappear. It didn’t. Puerto Rico’s economy has declined every year but one since 2006 and, with a population exodus for the U.S. mainland, there’s fewer people around to pay taxes needed to finance the debt.
At the same time, health care and retirement expenses are projected to increase. Its employee-retirement system is also deeply underfunded.
Q: What is Puerto Rico doing now?
A: Island officials are working on a debt-restructuring plan, to be finished by Sept. 1, and a five-year fiscal plan to improve the economy and balance the budget. Officials have said it’s premature to say by how much it will seek to reduce its debt and which securities could be affected.
Michelle Kaske
Puerto Rico Veers Toward First Bond Default: Questions Answered
Puerto Rico Default Risk Could Impact Average Americans
Puerto Rico’s expected default on August 1 on a small tranche of the government’s almost $73 billion dollar debt could have huge implications for millions of American retirees who are unaware they are invested in that debt.
The Puerto Rican Federal and municipal governments owe bond holders a combined $450 million dollars on Saturday August 1. Most of that is expected to be paid, but there are questions about the ability of Puerto Rico to make payments on debt issued by its Public Finance Corporation (PFC) of roughly $58 million dollars, and Government Development Bank’s (GDB) $169 million dollars, which are owed to investors.
Reuters reports Puerto Rico is expected to make the GDB payment, but no word on the PFC debt.
According to Morningstar Analyst Beth Foos, “…half of U.S. open-ended municipal-bond funds hold some exposure to debt of the commonwealth…funds collectively own more than $11.4 billion of the islands debt or just over 15% of its outstanding issuance.”
Millions of American retirees are invested in those muni-bond funds like the Oppenheimer Rochester Fund Municipals (RMUNX) or Goldman Sachs High Yield Muni (GHYAX) to name a few. Foos writes in a recent Morningstar note that Oppenheimer fund and Franklin Templeton Investments are two of the largest holders of Puerto Rico's debt. The price of Puerto Rican debt has been falling since late June when Governor Alejandro Padilla declared the commonwealth would be unable to pay its debts.
Height Securities Analyst Daniel Hanson writes, the “Looming August 1st bond defaults…could drive bonds much lower…” Bonds issued by Puerto Rico’s PFC are currently trading at roughly 14 cents on the dollar. Oppenheimer funds issued a statement to the Wall Street Journal on July 19 regarding negotiations between debt holders and Puerto Rico to avoid default. That statement said, “We have been managing investments in Puerto Rico for more than 20 years, and remain steadfast in serving the long-term interests of our shareholders.”
While a default on any of Puerto Rico’s debt would most likely wind up in protracted legal battles, Moody’s Investors Service issued an analysis on July 22 discussing the expected recovery rate investors might get should Puerto Rico default. The PFC and GDB bonds which Moody’s rates highly speculative have an expected recovery rate between 35 and 65 cents on the dollar. But pressure is growing in Washington D.C. for Congress to pass legislation which would grant Puerto Rico chapter 9 bankruptcy protection. Without it, Treasury Secretary Jack Lew says a Puerto Rico default, “…has the potential to further harm retiree investment portfolios across the country."
Legislation has been introduced in Congress to create bankruptcy protection for Puerto Rico to restructure its debt. But noted bond experts like Cate Long ask where would it end since no U.S.state or territory has the legal authority to declare bankruptcy even though some face crippling debt. Long says, “Puerto Rico represents a philosophical battle ground to the idea that states can spend more than they take in.”
Adam Shapiro joined FOX Business Network (FBN) in September 2007 as a New York based reporter.
By Adam Shapiro
Puerto Rico Default Risk Could Impact Average Americans
The Puerto Rican Federal and municipal governments owe bond holders a combined $450 million dollars on Saturday August 1. Most of that is expected to be paid, but there are questions about the ability of Puerto Rico to make payments on debt issued by its Public Finance Corporation (PFC) of roughly $58 million dollars, and Government Development Bank’s (GDB) $169 million dollars, which are owed to investors.
Reuters reports Puerto Rico is expected to make the GDB payment, but no word on the PFC debt.
According to Morningstar Analyst Beth Foos, “…half of U.S. open-ended municipal-bond funds hold some exposure to debt of the commonwealth…funds collectively own more than $11.4 billion of the islands debt or just over 15% of its outstanding issuance.”
Millions of American retirees are invested in those muni-bond funds like the Oppenheimer Rochester Fund Municipals (RMUNX) or Goldman Sachs High Yield Muni (GHYAX) to name a few. Foos writes in a recent Morningstar note that Oppenheimer fund and Franklin Templeton Investments are two of the largest holders of Puerto Rico's debt. The price of Puerto Rican debt has been falling since late June when Governor Alejandro Padilla declared the commonwealth would be unable to pay its debts.
Height Securities Analyst Daniel Hanson writes, the “Looming August 1st bond defaults…could drive bonds much lower…” Bonds issued by Puerto Rico’s PFC are currently trading at roughly 14 cents on the dollar. Oppenheimer funds issued a statement to the Wall Street Journal on July 19 regarding negotiations between debt holders and Puerto Rico to avoid default. That statement said, “We have been managing investments in Puerto Rico for more than 20 years, and remain steadfast in serving the long-term interests of our shareholders.”
While a default on any of Puerto Rico’s debt would most likely wind up in protracted legal battles, Moody’s Investors Service issued an analysis on July 22 discussing the expected recovery rate investors might get should Puerto Rico default. The PFC and GDB bonds which Moody’s rates highly speculative have an expected recovery rate between 35 and 65 cents on the dollar. But pressure is growing in Washington D.C. for Congress to pass legislation which would grant Puerto Rico chapter 9 bankruptcy protection. Without it, Treasury Secretary Jack Lew says a Puerto Rico default, “…has the potential to further harm retiree investment portfolios across the country."
Legislation has been introduced in Congress to create bankruptcy protection for Puerto Rico to restructure its debt. But noted bond experts like Cate Long ask where would it end since no U.S.state or territory has the legal authority to declare bankruptcy even though some face crippling debt. Long says, “Puerto Rico represents a philosophical battle ground to the idea that states can spend more than they take in.”
Adam Shapiro joined FOX Business Network (FBN) in September 2007 as a New York based reporter.
By Adam Shapiro
Puerto Rico Default Risk Could Impact Average Americans
Puerto Rico: No Money Available to Make $58M Bond Payment
Puerto Rico's government said Friday it would not make a $58 million bond payment due on the weekend and warned that the general fund will run out of liquidity by November if no action is taken.
Puerto Rico: No Money Available to Make $58M Bond Payment
Gubernatorial Chief of Staff Victor Suarez said at a news conference that the island's Public Finance Corporation could not meet the payment due Saturday.
"We don't have the money," he said, adding that the government still hopes to reach an agreement with creditors on renegotiating its debts.
Gov. Alejandro Garcia Padilla warned several weeks ago that the government and state agencies cannot repay the $72 billion in public debt that hangs over the U.S. territory, which is struggling with a nearly decade-long economic slump.
Puerto Rican officials contend that failure to make Saturday's payment will not constitute a default because it involves moral obligation bonds, which means there is no legal requirement to repay them.
But economists reject that argument.
"It is a default no matter how they try to disguise it," said Sergio Marxuach, policy director at the Center for the New Economy, a Puerto Rico-based think tank.
Marxuach and other economists said bondholders could file a lawsuit as soon as next week as a result of the nonpayment, which they said would be the first default in the history of the U.S. territory.
Justice Secretary Cesar Miranda said his department has been preparing for such a scenario. "Obviously we have been anticipating lawsuits," he said.
U.S. open-end bond mutual funds together own more than $11.4 billion of Puerto Rico bonds, or just over 15 percent of its outstanding debt, according to a Morningstar report. Hedge funds hold roughly one-third of Puerto Rico's debt. But experts have said they don't expect Puerto Rico's problems to have a spillover effect on the broader municipal market.
Ben Eiler, a U.S. bond trader who lives in Puerto Rico, owns bonds held by the Public Financing Corporation but said he was not surprised by the government's actions.
"Everyone in the world believes they're going to default," he said in a phone interview. "I anticipated that."
Eiler said he expects the bond's price to rise after a restructuring is worked out.
A group formed by the government to initiate debt renegotiation discussions and submit a five-year fiscal reform plan by Aug. 30 has been meeting regularly, Suarez said. He said that so far, they have studied 59 proposals to boost Puerto Rico's economy, including welfare and labor reforms and public-private partnerships.
Suarez said the group also received information about the general fund's liquidity.
"If we don't take any action, we'll be in the red by November," he said.
Puerto Rico's Government Development Bank, which oversees the island's debt transactions, also is struggling with liquidity. However, bank president Melba Acosta said in a statement that the institution would meet a $169 million bond payment due Friday.
Garcia's administration has pushed for the right for Puerto Rico's public agencies to file for bankruptcy under Chapter 9, but the proposal has not drawn any Republican co-sponsors in the U.S. Congress. The White House has said that no federal bailout is planned.
By DANICA COTOPuerto Rico: No Money Available to Make $58M Bond Payment
Puerto Rico Muni Index Falls to Six-Year Low as Default Looms
An index that tracks the performance of Puerto Rico’s municipal debt fell to a six-year low with the commonwealth on the verge of defaulting on some of its obligations for the first time.
The Standard & Poor’s Municipal Bond Puerto Rico index closed at 151.97 Thursday, the least since the wake of the global financial crisis in July 2009.
The commonwealth’s Public Finance Corp. will likely fail to make $58 million in bond payments due Aug. 1, the first default since Puerto Rico was ceded to the U.S. following the Spanish-American War. Government officials say they can’t make the payment because the legislature didn’t appropriate the funds last month for the current fiscal year.
“The big question mark for bond holders isn’t if they will get their money back, because it’s likely that they will not,” said J.R. Rieger, global head of fixed income at S&P Dow Jones Indices. “It’s whether they can actually sell bonds and get where they’re currently priced. The depth of the market does not appear to be there.”
Year to the date, the index is down 10.8 percent while an index tracking investment-grade municipals called the S&P National AMT-Free Municipal Bond index is up 0.55 percent, he said. The market value of the bonds in the Puerto Rico index has dropped by $6.9 billion this year, he said.
Governor Alejandro Garcia Padilla said in June that Puerto Rico cannot repay its obligations and was seeking to delay debt payments for a number of years. Prices of the securities have tumbled as officials prepare to release a debt-restructuring plan by Sept. 1.
Given the “uncertainty of Puerto Rico’s future, there’s a likelihood that these bonds can go lower,” Rieger said.
Romy Varghese
Puerto Rico Muni Index Falls to Six-Year Low as Default Looms
The Standard & Poor’s Municipal Bond Puerto Rico index closed at 151.97 Thursday, the least since the wake of the global financial crisis in July 2009.
The commonwealth’s Public Finance Corp. will likely fail to make $58 million in bond payments due Aug. 1, the first default since Puerto Rico was ceded to the U.S. following the Spanish-American War. Government officials say they can’t make the payment because the legislature didn’t appropriate the funds last month for the current fiscal year.
Year to the date, the index is down 10.8 percent while an index tracking investment-grade municipals called the S&P National AMT-Free Municipal Bond index is up 0.55 percent, he said. The market value of the bonds in the Puerto Rico index has dropped by $6.9 billion this year, he said.
Governor Alejandro Garcia Padilla said in June that Puerto Rico cannot repay its obligations and was seeking to delay debt payments for a number of years. Prices of the securities have tumbled as officials prepare to release a debt-restructuring plan by Sept. 1.
Given the “uncertainty of Puerto Rico’s future, there’s a likelihood that these bonds can go lower,” Rieger said.
Romy Varghese
Puerto Rico Muni Index Falls to Six-Year Low as Default Looms
Chicago mulls borrowing that Puerto Rico rejected as too risky
(Bloomberg) — Chicago is considering selling a type of debt that's fallen out of favor in other municipalities because it saddles taxpayers with higher costs by delaying payments.
Mayor Rahm Emanuel proposed issuing $500 million of bonds this week in an ordinance that would permit the use of capital appreciation bonds, where borrowers postpone interest and principal payments into one big sum at the end of the term. Emanuel's pitch also allows for the more common current interest bonds, which the city said it expects to use.
Chicago is struggling to plug its deficit and $20 billion of unfunded pension liabilities. Emanuel's move would give the third-most-populous city a means of borrowing without having to face the costs right away.
“Given where Chicago is at, it does seem like it's a way to kind of push off debt payments out longer, which from a credit standpoint is not favorable,” said Michael Johnson, managing partner at Gurtin Fixed Income Management, which oversees $9.5 billion of munis in Solana Beach, California. “It's probably not the best idea for them right now.”
Texas restricted the use of CABs in June and California has limited them since 2013. The Puerto Rico Electric Power Authority dismissed a bondholder plan last week to restructure its debt using capital appreciation bonds, citing the disproportionate risks.
ABUSIVE DEBT
If approved, the ordinance would give the city “the flexibility” to use capital appreciation bonds, but it also allows for the use of current interest bonds, which is what Chicago expects to sell, Molly Poppe, a city spokeswoman, said in an e-mail. Chicago hasn't issued capital appreciation bonds since 2009, she said.
Use of capital appreciation bonds have come under fire in Texas and California, where lawmakers have passed legislation to limit their use. Former California Treasurer William Lockyer called the debt “abusive” because it passes on large payments to future generations.
“They increase the total cost and lower flexibility going into the future,” said Steve Murray, a senior director at Fitch Ratings. “They can limit future borrowing ability.”
Emanuel also proposed selling $125 million of wastewater revenue bonds to fund swap termination payments, Poppe said. A separate ordinance would authorize $2 billion in bonds for O'Hare International Airport, including $1.7 billion of refunding for savings, and about $300 million of new money for capital projects and interest, according to Poppe.
Chicago mulls borrowing that Puerto Rico rejected as too risky
Mayor Rahm Emanuel proposed issuing $500 million of bonds this week in an ordinance that would permit the use of capital appreciation bonds, where borrowers postpone interest and principal payments into one big sum at the end of the term. Emanuel's pitch also allows for the more common current interest bonds, which the city said it expects to use.
Chicago is struggling to plug its deficit and $20 billion of unfunded pension liabilities. Emanuel's move would give the third-most-populous city a means of borrowing without having to face the costs right away.
“Given where Chicago is at, it does seem like it's a way to kind of push off debt payments out longer, which from a credit standpoint is not favorable,” said Michael Johnson, managing partner at Gurtin Fixed Income Management, which oversees $9.5 billion of munis in Solana Beach, California. “It's probably not the best idea for them right now.”
Texas restricted the use of CABs in June and California has limited them since 2013. The Puerto Rico Electric Power Authority dismissed a bondholder plan last week to restructure its debt using capital appreciation bonds, citing the disproportionate risks.
ABUSIVE DEBT
If approved, the ordinance would give the city “the flexibility” to use capital appreciation bonds, but it also allows for the use of current interest bonds, which is what Chicago expects to sell, Molly Poppe, a city spokeswoman, said in an e-mail. Chicago hasn't issued capital appreciation bonds since 2009, she said.
Use of capital appreciation bonds have come under fire in Texas and California, where lawmakers have passed legislation to limit their use. Former California Treasurer William Lockyer called the debt “abusive” because it passes on large payments to future generations.
“They increase the total cost and lower flexibility going into the future,” said Steve Murray, a senior director at Fitch Ratings. “They can limit future borrowing ability.”
Emanuel also proposed selling $125 million of wastewater revenue bonds to fund swap termination payments, Poppe said. A separate ordinance would authorize $2 billion in bonds for O'Hare International Airport, including $1.7 billion of refunding for savings, and about $300 million of new money for capital projects and interest, according to Poppe.
Photo by ThinkStock An ordinance would give Chicago "flexibility" to use capital appreciation bonds.
Chicago mulls borrowing that Puerto Rico rejected as too risky
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