• Commonwealth may ``deeply haircut bondholders'' of island debt
  • General obligation bondholders may be spared from deep cuts

Puerto Rico will need about $2.5 billion of debt relief each year in the medium term after calculating potential spending cuts, according to a Height Securities analyst.

After taking into account savings from potential reductions in education, health care and wage cuts and freezes, the commonwealth may still face a $2.5 billion gap per year in the medium term, Daniel Hanson, an analyst at Height Securities, a Washington-based broker dealer, wrote in a report Thursday. Hanson’s calculations are based on local reports of spending cuts as part of a debt-restructuring plan that the commonwealth hasn’t released yet, he said.

A $2.5 billion annual shortfall “implies that the commonwealth is still intending to deeply haircut bondholders of many (or most) Puerto Rican bonds,” Hanson wrote in the report.

Puerto Rico and its agencies owe $72 billion after years of borrowing to fill budget deficits. Governor Alejandro Garcia Padilla in June said the commonwealth was unable to repay all of its obligations on time and in full. The island’s economy has contracted every year but one since 2006.

Hanson calculates the $2.5 billion shortfall by applying potential expenditure savings and projected increased revenue against an estimated $4.2 billion consolidated deficit, according to the report.

The commonwealth’s general obligation bonds may be spared from adjustments, Hanson wrote. Puerto Rico faces a $357 million payment in January to investors of its general obligation bonds, according to data compiled by Bloomberg.

“The ability of the commonwealth to make immediate payments in January on general obligations bonds could be at risk simply as a function of cash flow,” Hanson said. “Nevertheless, we remain committed to the notion that general obligations bonds have a 50 percent or less probability of being impaired.”

Officials are considering a $1.5 billion five-year, self-funded capital expenditure plan to update infrastructure, according to the report. Changes to Puerto Rico’s taxes, including the implementation of a value-added tax to replace the island’s sales tax, may generate an additional $1 billion of revenue, according to the report.

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