Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

If you ask three people how much debt Puerto Rico has, you will most likely get three different numbers.

There’s the roughly $72 billion that Puerto Rico cites, a staggering amount for the cash-strapped island, which faces a shrinking population, deepening social woes and ballooning pension obligations. Others say it’s lower, perhaps closer to $60 billion after stripping out some utility-issued debt. Then there are those who argue that the number is actually about $100 billion, depending on what you think about the commonwealth’s zero-coupon bonds that come due over the next four decades.

The point is it's incredibly difficult to negotiate a solution to a problem when you can't even define what it is. The commonwealth hasn't done itself any favors on this score, delaying its 2014 annual financial statement for perhaps the longest period ever. It hasn't presented any concrete restructuring proposals. Whether by design or ineptitude, Puerto Rico has masked its true financial condition as it campaigns for a restructuring of its debt without a clear mechanism for doing so.

The confusion has given rise to a certain wild west narrative, with hedge-fund gunslingers riding into town to take advantage of the helpless townspeople.

 U.S. Representative Nydia Velazquez, a New York Democrat born on the island, just proposed legislation to force hedge funds to reveal more about their Puerto Rico investments. She said in a statement:

“It has become increasingly clear that hedge funds, which have purchased a sizable part of Puerto Rico’s debt, are exacerbating the crisis and profiting from the island’s misery.”

To be clear, hedge funds and other investors are certainly looking for an an opportunity to make money on the Puerto Rico debt mess, which has significant implications for the daily lives of the island's residents. Many of the hedge funds have bought bonds for significant discounts, hoping to get much more than that in whatever restructuring emerges from the wreckage. Jeffrey Gundlach, DoubleLine’s chief executive officer, said in an interview this week that Puerto Rico's general obligation bonds may end up being a big win for investors, potentially even offering a double-digit return.

It looks bad on the surface for investors to profit off the misfortune of Puerto Rico, but that’s the nature of the debt market. When people lend money, they want to get paid back. If they don't think they will ever see their money, they can transfer those obligations to others at a discount. No one forced Puerto Rico to borrow money. Without the promise of repayment, investors wouldn’t lend. Just look at what’s happening with Argentina right now.

Puerto Rico has sold debt through more than a dozen different borrowers, from the utility Puerto Rico Electric Power Authority, known as Prepa, to those tied to sales-tax collection and others that are the general obligation of the commonwealth. While there are about $57.5 billion of debt that pays regular coupon payments, another pool of bonds don’t pay anything on a regular basis until they mature, at which point they’d be worth about $38.6 billion, according to data compiled by Bloomberg.

Adding to the confusion, the default of one entity would not necessarily trigger a default for other Puerto Rico debt. The general obligation bonds carry a constitutional guarantee, though no one knows how strong that is. And Puerto Rico has no authority to restructure its debt in a bankruptcy court. It has asked Congress for that power, but lawmakers have shown little to no inclination to act.

It's no wonder Puerto Rico has made no progress in negotiating with hedge funds on a restructuring. All the opacity and confusion has opened the door to claims from hedge funds, investors and others that the island is in much better shape than it says it is. They have little motivation for coming to the table.

The longer the situation drags out, the greater the suffering for the residents of Puerto Rico. The island is hamstrung in part by powers out of its control. But until Puerto Rico can say, "This is our number, and here's what we can pay," no one is riding to to the rescue.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net