P.R. Bondholders May Lose in Revised Fiscal Plan
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.