Impending calamity in Puerto Rico, analysis from Reorg Research

From Reorg Research.

As a heavily levered U.S. Territory, Puerto Rico has nearly $70 billion worth of debt to which numerous U.S. and foreign financial institutions have heavy exposure. Tangentially connected banks and companies too have suffered from the current economic turmoil pervading the territory, as the territory’s municipal debt has been downgraded to near-junk and has been in a continuous spiral throughout the year. The duress has driven up the cost of debt and stoked concerns about Puerto Rico’s future access to capital markets – factors that have caught the attention of an increasing number of distressed investors and funds.

Given that the municipalities of a U.S. territory cannot file for chapter 9 protection – the specifics of which Reorg Research outlined earlier – the type of workout or restructuring for the region is uncertain if it reaches the point at which it simply cannot meet its obligations.

Puerto Rico Governor Garcia Padilla, who took office in January, has been taking urgent measures to put off what many market participants see as an impending crisis: In a presentation regarding the 2014 budget, the Puerto Rican government has suggested several initiatives in an attempt to balance the budget over the next two years, which mentioned the recent measures of overhauling the territory’s pension system, raising utility rates, and passing new tax measures.

Currently, 34% of Puerto Rico’s public debt pertains to the general fund and the remainder with public corporations, sales tax debt and municipalities. Separate from outstanding debt, the country also has a significant amount of underfunded pension liabilities. As of September, the public pension fund liabilities amounted to approximately $33 billion with only $4 billion of assets to cover such obligations.

Puerto Rico’s securities meanwhile have failed to keep pace with the broader U.S. muni market. For one, Puerto Rico’s $632 million in 5% general obligation bonds due 2041 traded at 61.83 today the $459.3 million 5.5% notes due in 2039 last traded at 68.5, according to trade data, down from the 90s and par, respectively, as late as June.

See more Breakdown of Puerto Rico Cap Structure on Reorg Research

About mkevane

Economist at Santa Clara University and Director of Friends of African Village Libraries.
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