Prices on Puerto Rico’s newest general obligations fell to a seven-week low after David Chafey, chairman of the Government Development Bank’s board, said he’s leaving as the island confronts a cash crunch.
Chafey, 61, a former Banco Popular president who’s been chairman of the GDB board since 2012, said he’s leaving effective June 30 “due to personal family reasons.” He’s helped orchestrate borrowings from Wall Street and his absence creates a leadership void, said Daniel Hanson, an analyst at broker-dealer Height Securities LLC. The GDB lends to the junk-rated commonwealth and its localities.
Investors are demanding higher yields on bonds of junk-rated Puerto Rico because of Chafey’s departure and because lawmakers are working on a bill that would allow the commonwealth to suspend monthly deposits of cash for repayment of general-obligation debt, Hanson said.
“That combination of things is making investors very skittish because they don’t know what’s going to get paid over the next couple of years,” said Hanson, who’s based in Washington. “Without Chafey in the room, it’s unclear if Puerto Rico can secure short-term financing.”
David Millar, a representative for the GDB at Sard Verbinnen & Co. in New York, said in an interview that the bank has begun the process of finding a successor to Chafey.
Puerto Rico needs to raise money as it begins a new fiscal year July 1. The GDB’s net liquidity fell to $778 million as of May 31, from $1.02 billion at the end of April.
The island is delaying tax rebates and borrowing from a state-run insurance agency to preserve cash. Officials are looking to sell as much as $1 billion of tax- and revenue-anticipation notes to pay for operations until revenue collections pick up. The government is also trying to issue $2.9 billion of bonds backed by oil taxes.
General obligations maturing in July 2035 traded Wednesday at an average of 77.6 cents on the dollar, the lowest since May 1 and down from 93 cents when they were priced in March 2014, according to data compiled by Bloomberg.
Puerto Rico securities have lost 1.1 percent this year, while the broader municipal market is flat, according to S&P Dow Jones Indices. The island and its agencies have $72 billion of debt, including $13 billion of general obligations.
The island’s House of Representatives on Tuesday approved a measure allowing the government to use cash for immediate needs rather than setting it aside every month to repay general obligations, if Puerto Rico is unable to sell the notes or oil-tax bonds, according to Rafael “Tatito” Hernandez, who chairs the House Treasury Committee. The bill now goes to the Senate.
“It’s all steps in the direction of making the credit weaker and creating more uncertainty as we get closer to the coupon dates,” said Daniel Solender, who helps manage $17 billion as head of munis at Lord Abbett & Co. in Jersey City, New Jersey.
The House this week gave preliminary approval to a fiscal 2016 budget that allocates money to repaying debt. Puerto Rico will pay investors in December and in June 2016 when general obligations come due, Hernandez said.