Puerto Rico’s escalating financial crisis pushed the commonwealth’s bond yields to the highest in more than a year this week as the government warned it may delay servicing debt and legislators said that furloughs could be needed.
Yields on 10-year Puerto Rico debt climbed to 10.36 percent Thursday, the highest since February 2014, according to data compiled by Bloomberg. The Caribbean island’s municipal bonds have lost 2.7 percent this year through May 7, the worst annual start since at least 2007, according to S&P Dow Jones Indices.
The island doesn’t have a 2016 budget approved for the fiscal year starting July 1, when the government is due to make a $630 million bond payment and the electrical power utility owes about $416 million. The legislature last week rejected a value-added tax plan that would have paved the way for a $2.9 billion oil-tax bond deal to help replenish the Government Development Bank, which provides liquidity to the government.
“There are a lot of things that need to be addressed,” said Dennis Derby, who helps manage $34 billion of munis, including commonwealth debt, at Wells Capital Management in Menomonee Falls, Wisconsin. “We don’t know what the liquidity looks like and we also don’t know if the GDB and the commonwealth have market access.”
Legislators and economists said yields on the island’s debt are too high for it to consider selling more bonds to help balance the budget for the fiscal year beginning July 1. Senate Finance Committee Chairman Jose Nadal Power said this week that a three-percentage point increase in the sales tax could help raise more than $600 million annually. Combined with budget cuts, he said the new revenue would help Puerto Rico avoid having to sell bonds to finance its deficit.
Governor Alejandro Garcia Padilla on Friday vowed to draft the “most austere budget in Puerto Rico’s history.” The government earlier warned that a failure to produce new revenue could result in $1.5 billion of budget cuts, including the elimination of funding for some non-profit organizations, education projects and health and agricultural programs. With a population of 3.5 million people, Puerto Rico and its agencies owe $72 billion, more than all but two U.S. states.
“The Commonwealth may lack sufficient resources to fund all necessary governmental programs and services as well as meet debt service obligations for fiscal year 2016,” according to a quarterly filing posted Thursday.
While Garcia Padilla has ruled out a default on the island’s general-obligation bonds, the government and the GDB may deplete their cash by Sept. 30, according to the report. That could force adoption of emergency measures after July 1, including “a moratorium on the payment of debt service, a debt adjustment” or tapping revenue from public corporations for debt servicing, the report said.
Meanwhile, the island’s outlook has divided investors, with DoubleLine Capital’s Jeffrey Gundlach and Marathon Asset Management’s Bruce Richards touting Puerto Rico debt this week. Richards called his firm’s holdings of the power utility’s notes “one of the best ideas that we have in our fund.” Pacific Investment Management Co. took the opposite approach, warning in a blog posting that the island faces “daunting challenges.”
The power utility, known as Prepa, has been in talks with creditors to negotiate a plan to restructure its $8.6 billion of obligations. Investors, insurance companies and banks that hold the authority’s debt agreed to a third extension, through June 4, of an agreement that keeps it out of default.
Puerto Rico projects a $191 million deficit in the fiscal year ending June 30, after the government tapped $344 million of bond proceeds to balance its spending plan. While tourism has been improving, economic indicators show that the island’s gross national product may contract in fiscal 2015 after shrinking 0.9 percent last year.
For more, read this QuickTake: Puerto Rico's Slide