Popular Extends Drop on Doubt About Puerto Rico Debt Load

Popular Inc. (BPOP), Puerto Rico’s biggest bank, extended a three-day slide after the island’s economy shrank and yields on the government’s debt rose past 10 percent.

The stock fell 20 cents, or 0.7 percent, to $29.24 at 11:48 a.m. today in New York trading. The shares have declined 15 percent since their two-year high on Aug. 20.

Chief Executive Officer Richard Carrion has struggled to rid Popular of bad loans after a $935 million U.S. bailout in 2008. The local economy contracted 5 percent this year through July, the most since February 2010, government data show. Puerto Rico’s bonds rank one step above junk, and yields have soared amid doubt about the government’s ability to carry more debt.

“Regardless of what Popular or any of the Puerto Rican banks own in their securities portfolio, they’re still highly dependent on the Puerto Rican economy,” said Alexander Twerdahl, an analyst at Sandler O’Neill & Partners LP. Teruca Rullán, a spokeswoman for Popular, was not immediately available to comment.

Popular’s bailout debt is the largest still outstanding in the Troubled Asset Relief Program’s capital purchase fund, the U.S. Treasury Department reported. That’s almost three times more than the second-largest debtor, Puerto Rico’s First BanCorp, which owes $254 million. That Santurce-based company has booked losses amounting to almost $200 million this year.

While Popular is talking with regulators about how to repay the U.S., there is no “specific time frame,” Carrion, 60, told investors on a July conference call.

Tax Benefit

Popular has been profitable in 2013 on the strength of a tax benefit. For the first half, the bank’s pretax loss amounted to $87 million. The stock gained 42 percent this year through yesterday.

Puerto Rico’s commonwealth general obligations maturing July 2040 traded Sept. 9 to yield a record 10.08 percent, data compiled by Bloomberg show.

The self-governing commonwealth of about 3.7 million people is on the brink of speculative grade as Governor Alejandro Garcia Padilla strives to reduce budget deficits and strengthen a pension system that’s more underfunded than any state. The July jobless rate of 13.5 percent also was worse than any state.

“There’s enough investors that still have probably more exposure than they’d like to have,” said Peter Hayes, head of munis at New York-based BlackRock Inc. (BLK), which manages $114 billion of local debt.

Debt sold in Puerto Rico is tax-exempt nationwide, leading mutual funds to add it to holdings including state-specific funds. Investors are being pummeled by the worst year for Puerto Rican bonds since at least 2000, with debt sold by the commonwealth and its agencies falling 17.8 percent, according to Standard & Poor’s data.

Carrion was elected earlier this year to a three-year term on the Federal Reserve Bank of New York’s board, representing banks with capital and surplus of more than $1 billion. He previously was on the board representing banks with less than $1 billion.

To contact the reporter on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net; Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Christine Harper at charper@bloomberg.net; David Scheer at dscheer@bloomberg.net

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