P.R. Bond­hold­ers May Lose in Re­vised Fis­cal Plan

The Bond Buyer - - Front Page - By ROBERT SLAVIN

Puerto Rico’s new fis­cal plan, due Wed­nes­day, is likely to be even harsher for bond­hold­ers than the pre­vi­ous plan, ac­cord­ing to mu­nic­i­pal an­a­lysts.

The 10-year plan ap­proved in March by the Puerto Rico Over­sight Board pro­jected enough money to pay off 24% of the debt due from Puerto Rico’s govern­ment and closely re­lated au­thor­i­ties. Now some ob­servers are pro­ject­ing the board will make no money avail­able to ser­vice the cen­tral govern­ment’s $51.5 bil­lion of bond debt.

In late Oc­to­ber the board voted to re­vise the plan and re­duce it to five from 10 years in the af­ter­math of the storm. The price

of Puerto Rico gen­eral obli­ga­tion bonds, which had been at about 59 cents to the dol­lar be­fore the storm, has fallen to less than half that amount.

“Given the slow nat­u­ral dis­as­ter re­cov­ery and what it’s done to the is­land and its peo­ple, I think the new plan will be a harsh one for all,” said Joseph Rosen­blum, di­rec­tor of mu­nic­i­pal credit re­search at Al­lianceBern­stein. “And I would ex­pect it will go through con­tin­u­ous re­vi­sions over the near term.”

On Dec. 5 Ger­ardo Portela Franco, Puerto Rico Fis­cal Agency and Fi­nan­cial Ad­vi­sory Au­thor­ity ex­ec­u­tive di­rec­tor, said he ex­pected govern­ment rev­enues to come in 25% short of bud­get in the fis­cal year. Through Dec. 22 to­tal in­flows into the govern­ment’s ac­count are down 12.8% from pro­jec­tions, ac­cord­ing to the govern­ment.

In mid-Novem­ber Bloomberg News re­ported that the board’s chief lawyer, Martin Bienen­stock of Proskauer Rose, said at a Nov. 15 Ti­tle III Puerto Rico bank­ruptcy hear­ing that a plan of ad­just­ment for the debt might ex­clude any debt pay­ments for five years.

“I hope they do in­clude debt ser­vice, but I think the com­mon­wealth may use the [lawyer’s] com­ments as an op­por­tu­nity, and jus­ti­fi­ca­tion, to cut them out,” said Shaun Burgess, Puerto Rico port­fo­lio man­ager for Cum­ber­land Ad­vi­sors, which holds in­sured Puerto Rico debt.

The board orig­i­nally asked Puerto Rico’s Fis­cal Agency and Fi­nan­cial Ad­vi­sory Au­thor­ity to sub­mit a pro­posed re­vised plan by Dec. 22. On Dec. 20 the board sent a let­ter to Gov. Ri­cardo Ros­selló say­ing that it was ex­tend­ing the dead­line to Wed­nes­day, Jan. 10.

The board also pushed back the dead­lines for pro­posed plans for the Puerto Rico Elec­tric Power Au­thor­ity and Puerto Rico Aqueduct and Sewer Au­thor­ity to Wed­nes­day from Dec. 22. Once the Puerto Rico govern­ment and th­ese au­thor­i­ties present the plans to the board there will be ad­di­tional steps be­fore they be­come adopted as of­fi­cial plans.

Board ex­ec­u­tive di­rec­tor Natalie Jaresko has said pro­ject­ing eco­nomic trends will be key to cre­at­ing a good fis­cal plan.

Af­ter Maria hit in late Septem­ber, Puerto Rico-based eco­nomic con­sul­tant In­teligen­cia Económica cre­ated a study with three dif­fer­ent pro­jec­tions for Puerto Rico’s cur­rent and fol­low­ing fis­cal year. The most neg­a­tive pro­jec­tion fore­cast a 2% de­cline in real gross do­mes­tic prod­uct in the cur­rent fis­cal year, which ends June 30, 2018, and a 0.5% growth in the fol­low­ing year.

The most op­ti­mistic sce­nario had a 2% de­cline this fis­cal year and a 5.4% ex­pan­sion in the next fis­cal year.

On Thurs­day, In­teligen­cia Económica chair­man Gus­tavo Vélez said he was now more op­ti­mistic than he was when his firm cre­ated the pro­jec­tions.

The study’s most op­ti­mistic sce­nario pro­jected a to­tal of $16 bil­lion in Fed­eral Emer­gency Man­age­ment Agency, other fed­eral aid, and pri­vate aid for Puerto Rico. Vélez said he now ex­pects be­tween $20 bil­lion and $30 bil­lion in fed­eral aid.

The ad­di­tional fed­eral aid will boost Puerto Rico’s econ­omy, he said. The fed­eral Amer­i­can Re­cov­ery and Rein­vest­ment Act of 2009 brought sub­stan­tially less fed­eral aid to Puerto Rico but contributed to a year of pos­i­tive eco­nomic growth in 2012.

His study’s sce­nar­ios pro­jected be­tween $5 bil­lion and $8 bil­lion in in­sur­ance re­im­burse­ments for Puerto Ri­cans. More re­cently the ex­ec­u­tive di­rec­tor of the Puerto Rico In­sur­ance Com­mis­sioner Of­fice told Vélez he ex­pected the to­tal will likely be $8 bil­lion to $10 bil­lion.

While Vélez said he was more op­ti­mistic, he was con­cerned about two other de­vel­op­ments. Elec­tric­ity has been re­stored to only 58% of cus­tomers and some ob­servers have said that it won’t be re­stored to every­one un­til the sum­mer. The other de­vel­op­ment is em­i­gra­tion of the is­land’s pop­u­la­tion.

Be­fore the storm 3.4 mil­lion peo­ple lived on the is­land. If it takes un­til the sum­mer for elec­tric­ity to be re­stored, per­haps 500,000 peo­ple will have left the is­land, he said.

Em­i­gra­tion and the de­lay in restor­ing elec­tric­ity are neg­a­tive fac­tors for the econ­omy, he said. ◽

Shaun Burgess at Cum­ber­land Ad­vi­sors is con­cerned the Over­sight Board may be poised to re­duced debt ser­vice to zero.

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