STUMP » Articles » Puerto Rico Round-up: What's Going On? » 15 February 2016, 10:58

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Puerto Rico Round-up: What's Going On?  


15 February 2016, 10:58

This is more for me to round up all the Puerto Rico finance news I can find, since I was distracted by Chicago (and don’t worry, Chicago is going to be coming back to the blog soon.) And then distracted by a cold (and the bitter, bitter cold… got down to -12 F here yesterday.)

Let’s set the stage with an overview from Wharton: Puerto Rico’s Debt Crisis: Why There’s No Quick Fix.

Facing $70 billion in debt and a 45% poverty rate, Puerto Rico’s leaders are expected to meet with creditors soon in an effort to negotiate a debt restructuring deal. But experts caution that there is no quick fix to getting the island Commonwealth back on solid footing and allowing it to emerge from the crisis on a more sustainable path.

The root of the island’s crisis, points out Jose Villamil economist at Estudios Tecnicos, a San Juan consultancy, is that both the population and the economy of Puerto Rico have become smaller, and are projected to continue to contract. The island’s population dropped from 3.8 million in 2000, to 3.64 million in 2012 to 3.548 million in 2014, Villamil says. “By 2030 the population is now estimated to be around 2.8 million, way below … the 2000 projection of close to 4.0 million by 2020.” He adds, “There is not a general awareness of what 10 years of economic contraction means” for the Commonwealth and its population.

Dealing with the Debt

Puerto Rico will be unable to muddle through without restructuring its debt, according to University of Pennsylvania law professor David Arthur Skeel. “The Commonwealth is probably going to have to restructure its debt, in addition to whatever else is done to help it out. Puerto Rico’s governor and congressional representative have been pushing for access to bankruptcy, at least for its municipalities, maybe for Puerto Rico itself.”

But Puerto Rico doesn’t have either option now because the island’s municipalities were excluded from Chapter 9, the municipal provisions of the bankruptcy laws, in 1984. “There has been discussion about some sort of federal funding — some kind of bailout,” Skeel adds. “There’s also been discussion about other legislative changes such as relaxing the minimum wage requirement, which many economists on both sides of the aisle think is too high for Puerto Rico.”

In Skeel’s view, “the most plausible — almost the only plausible — strategy starts with some kind of control board to oversee Puerto Rico’s finances, as was done with New York City back in the 1970s. It’s been done with Washington, D.C. and other cities since then. In addition, I think Congress needs to give Puerto Rico’s municipalities, at least — and probably Puerto Rico itself — access to bankruptcy.” Skeel notes that “if bankruptcy isn’t made available, it’s going to be a mess. It’s already turning into a mess now. Several bond funds have sued because of defaults, so there’s already litigation against Puerto Rico. There’s really no clear process for deciding who gets what if there’s no bankruptcy option.”

I have seen many ideas for trying to boost the productive economy in Puerto Rico, but the main issue that overhangs it all is the debt.

So let’s attack that specifically.


From CNBCFiery debate over Puerto Rico’s debt at investment summit:

Two of the biggest players in the battle over how to restructure Puerto Rico’s $70 billion debt load came face to face on Thursday at an investment summit in San Juan.

The fiery debate between Jim Millstein, the U.S. territory’s lead debt restructuring adviser, and Nader Tavakoli, the CEO of Ambac — one of the largest insurers of PR-issued debt — was over whether the island should be granted access by Congress to Chapter 9 bankruptcy laws to restructure a large portion of its outstanding debt.

The commonwealth’s restructuring proposal, unveiled Feb. 1, addresses $49 billion of the approximate $70 billion in the total outstanding debt due to bondholders. Under the plan, which Millstein helped construct, the outstanding principal owed to bondholders would be slashed by nearly $23 billion, by enacting a number of extensive measures to try to reduce the large fiscal deficit. However, even after the implementation of all the measures in the plan, there’s still a $23 billion financing gap, or about two-thirds of the debt service due over the next 10 years, that Millstein argues needs to be restructured.

That’s not really a solution, then.

Let’s see the other side of the debate:

“I am not sure where this notion bankruptcy is a good thing came from, but I have had 35 years of experience in bankruptcy, and I will tell you most assuredly It’s a terrible idea,” said Tavakoli. “It will chase consumer confidence to zero, it will chase investor confidence away from the island, and to be sitting here at an investment seminar and be talking about the island defaulting on its obligations to its creditors when there are other very viable options is frankly a little bit surreal for me.”

Nobody is saying that bankruptcy is good. They’re saying it’s the only orderly and fair way to deal with the creditors.

Because PR can’t afford to pay back its debt at all.

We’ll come back to that in a bit.


Puerto Rico is trying various things to get the cash flowing again. Incentives for wealthy people:

SAN JUAN, Puerto Rico (AP) — Puerto Rico’s government is trying to persuade hundreds of wealthy investors to move to the U.S. territory, hoping they could help lift it out of a deepening economic crisis.

Officials hosted a meeting for investors last week to promote local tax incentives aimed at luring the wealthy. Speakers included former New York City Mayor Rudy Giuliani and New York hedge fund billionaire John Paulson, who recently bought some of Puerto Rico’s most upscale resorts as the island struggles to emerge from a nine-year economic slump.

Paulson said solving the island’s fiscal situation is essential to encouraging investment.

“It has created some halo around Puerto Rico,” he said, adding that he has no immediate plans to move to the island. “I find the lifestyle very, very attractive. It’s something I would consider in the future, but right now I’m in New York.”

Paulson said he doesn’t own any of the island’s staggering $72 billion public debt.

Puerto Rico has persuaded other wealthy people to move to the island with measures approved in recent years that exempt people from taxes on any capital gains accrued after they move to the island.

So how much cash does that really bring to local coffers?

Not enough to pay the interest payments for the PR debt, I’d say.

More comments from Paulson:

Despite Puerto Rico’s massive debt crisis, Paulson sees big profits ahead. He has plowed “quite a bit” — an estimated $1.5 billion — of his personal wealth into buying hotels, a resort and office buildings on the island.

Paulson compares Puerto Rico today to Miami in the 1980s.

“It’s similar to that period in Miami’s history,” Paulson said Thursday at the Puerto Rico Investment Summit. “There was a lot of real estate on the beach, lots of abandoned buildings and vacant lots. That was definitely the best time to buy [in Miami].”

Now he says it’s Puerto Rico’s turn. In addition to buying investment properties, Paulson also built a vacation home and bought an apartment for his family on the island.

At the summit, Paulson clarified that most of these investments have been personal. They are not in the Paulson & Co. real estate funds.

As for the $70 billion in Puerto Rican government debt that is making headlines, Paulson says his funds don’t own any of it and neither does he.

I can see how this is a good personal investment. I’ve been to Puerto Rico a couple times on vacation, and it’s a nice place to visit. It’s large as a Caribbean island, and it’s easy to travel to compared to some of the small islands down there. So this may very well be a good time to buy vacation properties, whether for personal use or as a business prospect.

But that’s not the same as buying their debt.

More on the investor incentives:

“Puerto Rico residents are not subject to US federal income tax and Puerto Rico, in order to incentivise, has also waived most Puerto Rican income tax so by moving here you can essential minimise your taxes in a way that you can’t do anywhere else in the world,” he said. Outside protesters and politicians marched holding placards accusing the investors of being criminals and destroying their country.

Explaining why he is investing so much money in the island, Paulson said: “Puerto Rico is America. I love the Caribbean and other parts of South America, but what makes Puerto Rico unique is that you get the climate of being so far south [and] you get all the legal protections of the United States.”

And there is much that investors will recognise in the troubled island. There is little sign of economic crisis in the island’s luxury resorts of Bahia Beach, Dorado Beach and San Juan’s exclusive waterfront West Condado neighbourhood with its Gucci and Cartier stores.

‘Unparalleled incentives … to boost your profits’

At the conference hedge fund managers, who have been accused of helping push the island deeper into crisis by buying up its debts and demanding repayment ahead of spending on schools, were wooed by Puerto Rico’s governor, Alejandro García Padilla.

“This is truly a historic moment full of opportunities,” Padilla told delegates at the Puerto Rico Investment Summit in the island’s convention centre. “We are truly convinced of our unparalleled incentives … to boost your profits.”

And for a bit of fun, here’s MST3K doing their own critique of a 1973 Puerto Rico promo: Progress Island, USA

If you read that Guardian article, you see critiques from those who think investors need to be paying more taxes. And it would be in the interest of those developing vacation properties to make sure the infrastructure is solid, at the very least.

But these guys didn’t build up the debt — which is paying for past developments… or past corruption.

The point is that investors have options for places to invest. They don’t have to buy anything in Puerto Rico. Perhaps they would come even if there were taxes at New York levels. Or maybe they wouldn’t.


Here’s the creditors’ counteroffer:

A group of Puerto Rico bondholders have made the first counter offer since the commonwealth proposed a significant restructuring last week with a plan that would secure full principal payment from the US territory.

Investors holding senior debt issued by the Puerto Rico Sales Tax Financing Corporation, known as Cofina by its Spanish acronym, have sought to avoid a haircut while providing debt relief to the island, US capital markets correspondent Eric Platt reports.

The offer from Goldentree Asset Management, Metropolitan Life Insurance and Whitebox Advisors would postpone payments until 2018, giving policymakers on the island time to jump start economic activity, improve tax collection and tackle Puerto Rico’s high poverty and unemployment rates.

Under the plan, the commonwealth would suspend repayments to senior Cofina creditors until 2018 — a debt moratorium that a working group launched by the commonwealth have also proposed — before steadily rising to at least $600m a year by 2021. Payments due in the commonwealth’s 2016 fiscal year by Cofina have already been set aside with the bond trustee.

Under a working group’s proposal, the island sought to cut the government issued debt by 46 per cent, including a nominal haircut of more than 50 per cent on outstanding Cofina paper. The net present value of the cut is far larger, as the bonds will be repaid over a longer time horizon than when they were originally issued, investors say.
The senior Cofina plan would prioritize their repayment over subordinated debt holders, with expectations of a full par return for the senior liens between 2034 and 2047 in three economic scenarios laid out by the working group.

Mr Kirpalani notes that if the plan received backing from a majority of the roughly $7bn in senior note holders, subordinated holders would be bound by the agreement.

“It’s a way to at least solve the Cofina part of the puzzle,” he added. “I don’t think it is in anyone’s interest to litigate. This provides liquidity that the general fund needs.”

I understand the desire to push off the day of reckoning re: the principal. Better to keep open the possibility that they’ll actually get their principal back than to accept a 50% cut right now. And maybe they can lobby for a federal bailout in those two years.

But what if there’s no bailout?

And what if Puerto Rico is in a worse position in 2018?

But back to the creditors’ comments:

“Bankruptcy is a huge mistake,” Tavakoli said during the panel with Millstein and Lisa Donahue, chief restructuring officer of the island’s main power provider. “Puerto Rico has a liquidity problem, not a solvency problem. Also, Puerto Rico has a spending problem.”

Commonwealth officials have lobbied Congress to allow it to access bankruptcy, a provision that U.S. territories don’t have. They say it would better allow Puerto Rico to pull together its various creditors — hedge funds, mutual funds, individual bondholders and insurance companies — that hold or guarantee a range of commonwealth securities with different repayment pledges and legal protections.

For Tavakoli and other bond-insurance companies, granting bankruptcy access would change the rules in the middle of the game and not address the island’s structural problems, he said.

Congressional lawmakers are working on legislation that may give Puerto Rico some sort of bankruptcy powers and also implement a federal control board that would manage budgets and debt issuance. House Speaker Paul Ryan has asked members to craft legislation by the end of March to help the commonwealth address its debt crisis.

Given what I know about the Puerto Rican pensions, I don’t see how anyone can say they don’t have a solvency problem. It’s pretty clear they’re deeply insolvent, even ignoring the pension debt.

But you shouldn’t ignore the pension debt.

Yes, the spending problem is huge as well. It just adds to the current insolvency.


Or Orrin Hatch wants info.

Feb 10 U.S. Senator Orrin Hatch on Wednesday demanded detailed financial disclosure about the island’s economic crisis in a letter to Puerto Rico’s governor, and questioned U.S. Treasury Secretary Jack Lew about debt restructuring proposals for the island during a Senate Finance Committee hearing.

Hatch, a Utah Republican and chair of the Senate committee with oversight on Puerto Rico’s fiscal crisis, in December co-sponsored a bill to bring the island’s finances under a federal control board.

But his exchange with Lew on Wednesday, coupled with his 4,000-word letter to Puerto Rico Governor Alejandro Garcia Padilla, may be stronger signs that Republican leaders are serious about addressing Puerto Rico’s economic crisis.

The U.S. commonwealth faces $70 billion in bond debt, a 45 percent poverty rate and a shrinking tax base as locals increasingly flock to the mainland United States. Federal legislators, mostly on the Republican side, have demanded more transparency from the island, whose fiscal year 2014 financials are months behind schedule.

Hatch’s letter to Garcia Padilla is one of the first acknowledgements by U.S. lawmakers of the strain on Puerto Rico’s pensions, which are underfunded by some $43.5 billion and projected to run out of money within about three years.

Delayed financials is always a bad sign.

How can one even say that the problem is just liquidity (short-term cash flow) versus structural insolvency (long-term, and possibly needing the clean sweep of legal bankruptcy to reset) if you don’t even have reliable financials?

I can imagine some sort of workout short of actual bankruptcy, but I don’t think the underlying problem is solved by kicking payments 2 years down the road, even if the interest payments for that period aren’t required.

Obviously, many will keep their eyes on this, especially if Puerto Rico is given the bankruptcy option by Congress… many will see this as a possibility for states like Illinois and New Jersey. It wouldn’t directly transfer between a territory versus a state (especially with federalism/sovereignty issues), but it still would set a precedent.

So I can see something short of a full bankruptcy process getting approved in Congress. But no bailouts.

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