Puerto Rico House Rejects Tax-Overhaul, Pushing Bonds Lower

Updated on

Puerto Rico’s House of Representatives rejected a tax-overhaul bill that would have paved the way for a $2.9 billion debt sale needed to avert a cash crunch, pushing prices on the commonwealth’s newest bonds to a record low.

The chamber voted against the measure 28 to 22 early Thursday morning, Ileana Baez Bravo, a spokeswoman for Governor Alejandro Garcia Padilla, said in an e-mail. The bill, which failed to gain unanimous support from legislators of the governor’s Popular Democratic Party, would have introduced a 13 percent levy on goods and services along with a 1 percent sales tax.

The rejected bill was based on a February proposal from the governor, who’s set to give his annual State of the Commonwealth speech Thursday at 5 p.m. local time. His remarks will address the junk-rated territory’s fiscal health, he said in a statement. Last week, the Government Development Bank warned the government may shut down within three months because of a lack of funds.

Popular Democratic Party lawmakers who “voted against the bill have jeopardized the future of Puerto Rico,” Garcia Padilla said in the statement. “We are now tasked with retaking a responsible course of action and continue forward with our agenda of reconstruction.”

Dwindling Cash

The Development Bank, which handles the U.S. commonwealth’s debt sales, has said passage of the tax plan is essential to attract investors to the planned bond deal. Proceeds of the debt would bolster the finances of the bank, which lends to the island and its localities.

The bank’s net liquidity declined to $1.1 billion as of March 31 from $2 billion in October. Puerto Rico’s economy has struggled to grow since 2006. After years of selling debt to balance budgets, the island and its agencies have $73 billion of bonds, whose interest is tax-exempt nationwide and which are held by mutual funds, hedge funds and individuals.

Puerto Rico general obligations maturing in July 2035 traded Thursday at an average price of 78.76 cents on the dollar, the lowest since they were issued in March 2014, according to data compiled by Bloomberg. The average yield was 10.56 percent, equivalent to a taxable 17.5 percent for top earners.

Disappointed Investors

“It was a disappointment to the bond market,” said Gary Pollack, who manages $6 billion of munis as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management in New York. “And it shows a lack of cohesion in the legislature to come up with a solution to restore liquidity for the commonwealth.”

The vote against the tax changes underscores the discord among lawmakers as they seek to pass a budget before the fiscal year begins July 1. Garcia Padilla has yet to release his budget proposal. The legislature must work together to create a balanced spending plan, Senate President Eduardo Bhatia said in a statement after the House vote.

“I urge everyone to move past the controversy, and to develop and implement a balanced and credible budget that includes expenditure reductions and reliable revenue measures that can be rapidly implemented and absorbed by the economy,” Bhatia said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE