Puerto Rico May Not Be Able to Avoid Defaults, Adviser Says

Puerto Rico: Bankruptcy or Bailout?
  • Commonwealth may run out of cash by November without loan
  • Bank faces Dec. 1 bond payments, some guaranteed by island

Puerto Rico, at risk of running out of cash as soon as November, may be unable to pay investors as it looks to restructure $73 billion of debt, said Steven Rhodes, the former U.S. bankruptcy judge who is advising the island’s government.

Puerto Rico faces a $354 million principal and interest payment on Dec. 1 for Government Development Bank debt, including securities that the commonwealth backs with its general-obligation guarantee, according to bond documents. Officials have said the government may run out of cash in November unless it can get a short-term loan or renegotiate its debts. A $357 million interest payment on general-obligation bonds is due Jan. 1.

“I’m not sure that Puerto Rico will have any choice on the issue of default,” Rhodes, who presided over Detroit’s record bankruptcy, said in a television interview Friday on "Bloomberg <GO>" with David Westin and Stephanie Ruhle. “Its financials suggest that it is going to run out of money very soon. It is suffering a liquidity crisis, and I’m not sure it will have any choice in the issue of default.”

Puerto Rico and its agencies racked up $73 billion of debt by borrowing for years to balance budgets as the economy struggled to grow. Officials are negotiating with investors and insurance companies about what’s owed by the development bank, and Governor Alejandro Garcia Padilla’s administration plans to push for a broader restructuring of Puerto Rico’s bonds.

The price of Puerto Rico’s bonds has slid this year amid speculation over how much debt will be affected. Securities due in 2035, the most frequently traded, changed hands Friday at an average of 74.5 cents on the dollar to yield 11.2 percent. They were first sold to investors for 93 cents in March 2014.

The Electric Power Authority, the island’s main electric utility, has struck a tentative deal with some of its bondholders and lenders to restructure the $8.3 billion it owes. Bond insurance companies have balked at the proposed agreement and are still negotiating.

The outcome could serve as a model for how to deal with other Puerto Rico debts, Tom Wagner, co-founding partner of hedge fund Knighthead Capital Management, said Friday during a Bloomberg Television interview. Knighthead owns the utility’s bonds.

“A constructive and collaborative approach between the debt issuer and the debt holders is oftentimes the best way to approach these situations,” Wagner said.

Rhodes said he disagrees. Given how many Puerto Rico agencies have sold bonds and the number of creditors involved, the island needs a way to swiftly tackle its fiscal crisis and avoid talks that could drag on for years, he said. Puerto Rico has been pushing for Congress to give some agencies the power to file for bankruptcy, though a bill to do so has stalled for lack of Republican support.

“How long is it going to take if there are 17 entities and we do them one year at a time?" Rhodes said. “We don’t have that time. We’re closing schools. Seniors need their pensions in order to buy their medicines.”

If Puerto Rico fails to repay the development-bank bonds due Dec. 1, it would be the first default on debt guaranteed by the commonwealth. While one of its agencies, the Public Finance Corp., has skipped payments on its bonds since August, those securities were only backed by legislative appropriations, which lawmakers didn’t authorize.