Which Puerto Rico Bond Defaults Next? 46% Yields Provide a Clue

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Puerto Rico defaulted for the first time on Aug. 3, when a little-known agency, the Public Finance Corp., paid investors just $628,000 of the $58 million they were owed.

The Finance Corp. is only one of the 17 arms of the U.S. territory that have sold tax-exempt bonds, according to the Government Development Bank. Unlike debt typically issued by countries, the securities carry varying degrees of risk because they’re backed by different sources of funds and legal safeguards.

So as the island burns through cash, there’s the obvious question: which bonds could be next?

Puerto Rico’s big bond payments aren’t until December and January, when $1.4 billion of principal and interest is due, and Governor Alejandro Garcia Padilla may arrive at a plan for retooling the commonwealth’s $72 billion of debt before then. Victor Suarez, Garcia Padilla’s chief of staff, on Monday said the government expects to have the cash needed to make the interest payment in January on its general-obligation bonds as it plans to borrow money to keep the government afloat.

With speculation building about how Puerto Rico’s various securities will weather the island debt crisis, bond prices show the market’s best guess.

What follows are the most recent trading prices of bonds that aren’t insured against default, according to data compiled by Bloomberg. They are listed from the highest yields (which represents the most risk) to the lowest. If available, the expected rates of recovery under a default are included, as estimated by Moody’s Investors Service on July 22:

Puerto Rico Public Finance Corp.: Bond maturing in 2031 last traded for 9 cents on the dollar for a yield of about 61 percent.

That’s no surprise, given the default. The $1 billion of securities are paid only with money earmarked by the legislature, which “is not legally bound to appropriate funds,” according to bond disclosures. Faced with a budget shortfall, it didn’t. Investment firms are prodding officials to make good on the payment.

Expected recovery: 35-65 percent.

Puerto Rico’s Government Development Bank: Federally taxable bonds maturing in 2019 last traded for an average yield of 46 percent.

The GDB lends to the commonwealth and its localities. When those loans are repaid, the bank can pay off the debt. It has $5.1 billion outstanding.

Recently, the bank has been draining its funds. By May 31, it had $778 million of net liquidity, down from $2 billion in October. Officials have previously said it was at risk of running out of cash by Sept. 30 unless it could borrow money or extend the maturities of short-term debt coming due.

Expected recovery: 35-65 percent.

Puerto Rico Highways & Transportation Authority: Bonds maturing July 2028 last traded for an average yield of 36 percent.

The highway agency repays its $4.7 billion of debt with revenue from gasoline taxes. The struggling agency was relying on a $2.9 billion oil-tax deal to help repay loans its owes the GDB. With the island’s move to restructure debt, that borrowing fell through.

Expected recovery: 35-65 percent.

Puerto Rico Infrastructure Financing Authority: Bonds maturing in 2046 last traded for an average yield of 34 percent.

Called Prifa, the agency has sold the island’s $1.9 billion of rum-tax bonds. These are securities repaid from federal excise taxes on rum made in Puerto Rico, which is subject to re-approval by a U.S. Congress prone to delay.

Expected recovery: 35-65 percent.

Puerto Rico Pension-Obligation Bonds: Securities maturing in 2038 last traded for an average yield of 22 percent.

The taxable debt, $2.9 billion of which is outstanding, was issued to bolster the island’s main pension fund. The bonds are repaid from contributions that the commonwealth and municipalities make to the retirement system. Faced with budgetary strains, Puerto Rico officials could decide not to allocate the money for the securities.

Expected recovery: 35-65 percent.

General Obligations: Bonds maturing in 2035 last traded for an average yield of 12 percent, while those due in 2041 yielded

about 9 percent.

The $13 billion of securities, which are among the most actively traded Puerto Rico bonds, are protected by the commonwealth’s constitution. If the government doesn’t have enough money to pay all of its bills, bondholders can turn to court to make sure they get paid.

That makes them relatively secure. However, to free up cash, the commonwealth recently halted deposits into the fund that pays debt-service bills on the securities, according to a disclosure last week. The next big payment on the bonds is a $357 million of interest due in January, according to data compiled by Bloomberg.

Expected recovery: 65-80 percent.

Puerto Rico Public Buildings Authority: Bonds maturing 2042 last traded for an average yield of 10.6 percent.

The $4.1 billion of outstanding securities are repaid with the money that public agencies pay to lease their office buildings. The debt is more secure than typical revenue bonds because the commonwealth has guaranteed repayment.

Puerto Rico Electric Power Authority: Bonds maturing in 2040 last traded at an average yield of 10.3 percent.

With $8.3 billion of debt, the island’s main power provider has been negotiating with creditors for a year to restructure what it owes and free up money needed to modernize the system. Moody’s said on Aug. 6 that the agency’s latest restructuring plan would make default “a virtual certainty.”

Expected recovery: 65-80 percent.

Puerto Rico Sales Tax Financing Corp.: The bonds, called Cofinas, are repaid from dedicated sales-tax revenue and come in two types: senior, with the first claim on revenue, and subordinated, which are second in line.

Senior Cofinas maturing in 2040 last traded for an average yield of 9.3 percent, while subordinate ones yielded about 15 percent.

There are $15.2 billion of the securities outstanding. The island collected $1.42 billion of sales-tax revenue in the fiscal year that ended June 30, with about $670 million of that repaying Cofinas, according to the Treasury Department.

Expected recoveries: 65-80 percent for seniors; 35-65 percent for subordinated.

Puerto Rico Aqueduct & Sewer Authority: Bonds maturing in 2042 last traded at an average yield of 8.3 percent.

The utility, which has almost $5 billion of bonds and notes outstanding, supplies most of the island’s water. The debt is repaid from water rates, which were raised by 60 percent in July 2013. With a $750 million bond sale planned, the agency will be the first to test the commonwealth’s ability to borrow after the default.

Expected recovery: 65-80 percent.

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