Photographer: Barry Winiker/Getty Images

Puerto Rico Rally Hints at Acceptance of Wider Restructuring

  • General Obligation debt trades at highest in two months
  • Main debt restructuring plan due to governor on Sept. 8

Puerto Rico bonds are suggesting that investors are coming to the conclusion that Governor Alejandro Garcia Padilla will succeed in extracting broader concessions from debt holders after the commonwealth reached a tentative agreement to restructure the electric utility’s obligations.

General-obligation debt rallied to the highest level in two months and an index of commonwealth debt had the biggest one-day gain since 2008. Puerto Rico’s Electric Power Authority said investors would assume losses of as much as 15 percent on the agency’s revenue bonds. The value of Puerto Rico’s debt had tumbled in the past two years as the island’s financial health eroded and Garcia Padilla said in June he would seek a moratorium on payments.

“He just got a bunch of bondholders to concede to a haircut, so the strength is in his court now to get others,” said Matt Dalton, chief executive officer of Rye Brook, New York-based Belle Haven Investments, which manages more than $3 billion of municipal securities, including Puerto Rico debt. “He’s got the momentum.”

Advisers are scheduled to present Garcia Padilla on Sept. 8 with what the administration has labeled as an economic recovery and debt-adjustment plan that will cover the commonwealth’s entire $72 billion debt burden.

General obligations with an 8 percent coupon and maturing July 2035 traded Thursday at for an average 75.9 cents on the dollar to yield 11 percent, according to data compiled by Bloomberg. That’s up from 66.6 cents on June 30, after the governor said the island of 3.5 million is unable to repay all of its obligations.

An index of Puerto Rico securities gained 2.95 percent Wednesday, the biggest one-day advance since December 2008, according to S&P Dow Jones Indices. The commonwealth’s debt is still down 7.7 percent this year, even as the broader municipal-bond market has gained one percent.

The electric utility, known as Prepa, persuaded investors of 35 percent of its outstanding bonds to accept 85 percent of face value on the securities they hold and delayed debt payments. Trading prices suggested investors were concerned the losses would be greater.

“The Prepa agreement, if successfully finalized and executed, will demonstrate that consensual agreement is possible, which could reflect well on future negotiations,” Alan Schankel, a managing director at Janney Montgomery Scott LLC in Philadelphia, said in a report Thursday.

Prepa is the first Puerto Rico entity to reach an accord with some bondholders on how to alter existing debt and may provide a framework as commonwealth officials seek to reduce the island’s obligations and grow an economy that’s been in decline for the past decade. The utility’s restructuring would be the largest-ever in the $3.6 trillion municipal-bond market.

“Here’s a template that’s obviously in agreement with most people and the hope is that the template will work in other situations,” Dalton said.

Puerto Rico and its agencies racked up $72 billion by borrowing to fix budget shortfalls and push off debt payments. On Aug. 3, the commonwealth defaulted when one of its agencies failed to pay investors $58 million of principal and interest after lawmakers didn’t allocate the funds because of a budget crunch.

“All around, the momentum is positive with just any agreement being reached,” said Daniel Solender, who helps manage $17 billion, including Puerto Rico debt, as head of municipals at Lord Abbett & Co. in Jersey City, New Jersey.

Prepa bonds maturing July 2040 traded Thursday at an average price of 65.7 cents on the dollar, the highest since April 10, data compiled by Bloomberg show. The average yield was 8.6 percent.

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