Pimco Shuns Puerto Rico as It Sees Investor Haircuts a Must

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Pacific Investment Management Co. says it doesn’t own any Puerto Rico bonds for a good reason.

That’s because the provider of fixed-income mutual funds anticipates that holders will have to accept less than 100 cents on the dollar under a likely restructuring of the commonwealth’s $72 billion of obligations, even if the island’s top debt official says otherwise.

“Adjusting to a sustainable servicing capacity over the longer term would necessitate larger haircuts through reduction of principal,” Sean McCarthy, head of Pimco’s municipal credit research in New York, wrote in a blog post Thursday. “If not, then Puerto Rico, like Greece, faces future rounds of restructuring.”

Governor Alejandro Garcia Padilla last month said Puerto Rico would look to delay debt payments for “a number of years,” pushing the island toward the largest restructuring ever in the $3.6 trillion municipal-bond market. Melba Acosta, president of the Government Development Bank, has said it wouldn’t necessarily involve paying less than the full value of securities when they mature.

McCarthy said it may have no choice. Puerto Rico’s economy has contracted in every year but one since 2006 and is expected to shrink again by 1.2 percent in fiscal 2016. About 245,000 residents are projected to leave the island by 2025, continuing an exodus that’s already caused its population to decline by 7 percent in the past decade.

Rising Probability

“Puerto Rico’s debt is not sustainable without real economic growth and a consolidated surplus,” McCarthy wrote. “These will remain elusive over the next several years by any reasonable estimate.”

Commonwealth securities have traded at distressed levels for two years on concern the island won’t repay all of its debt on time. General-obligation bonds maturing July 2035 and originally sold at 93 cents on the dollar traded Friday at an average price of 73 cents on the dollar, down from 87.1 cents in January, data compiled by Bloomberg show. The average yield was 11.5 percent.

Puerto Rico’s Public Finance Corp.agency this week failed to transfer cash to a trustee to cover an Aug. 1 debt payment because the legislature didn’t appropriate the funds.

The probability of a default on Puerto Rico’s securities is approaching 100 percent, Ted Hampton, a Moody’s Investors Service analyst in New York, wrote in a report Friday. Bondholders lack “significant” remedies if lawmakers fail to appropriate funds, he said.

“More legally vulnerable bonds carry the greatest loss potential,” Hampton wrote.

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