Markets

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

Puerto Rico says it's facing an imminent debt crisis, but its latest restructuring plan doesn't appear to be a concentrated effort to resolve it. It seems content to wait on a solution to somehow appear from some quarter, but it's far too late for wait-and-see.

Debt Debacle
Puerto Rico's $70 billion of debt is overwhelming its shrinking population.
Source: State Budget Solutions, Moody's

The island did finally come forward with its first concrete road map for how to manage its suffocating $70 billion debt pile. It said it would cut obligations by 46 percent, delay any interest payments for years and create "growth bonds" that would most likely be worth nothing. 

Unfortunately, the proposal was dead on arrival. It didn't even move the ball forward enough to engender some confidence from creditors that there could be a path to a speedy resolution, which was crucial to making progress. 

For evidence of how completely irrelevant this plan ended up being, take a look at the commonwealth's most frequently traded bonds. The debt's price moves were entirely unremarkable and didn't seem to have a lasting market effect. Its benchmark general obligation notes that mature in 2035 fell 1.6 cents, to 70.6 cents on the dollar, but have since rebounded to 71 cents, according to Municipal Securities Rulemaking Board data.

Barely Budging
Bond traders weren't all that responsive to Puerto Rico's Feb. 1 restructuring plan.
Source: Municipal Securities Rulemaking Board



Puerto Rico's 5.125 percent notes due in 2031 moved more, rising to 63.3 cents from 59.7 cents Monday, but the move isn't close to ranking among the biggest price swings. 

"The restructuring plan is absolutely not credible and a very low starting point for negotiations," Michael Ginestro, Bel Air Investment Advisors director of municipal research, said in a Bond Buyer article. "In fact, I don't even think creditor groups would even consider responding."

It's a shame that this proposal didn't offer more progress. Worse than that, it will probably be a costly mistake for the island, which needs a coordinated, comprehensive solution to start climbing out of its mess. Lawmakers in Washington, who discussed the crisis this week, are trying to come up with a way to help (maybe, depending on the representative), but it's unclear whether anything concrete will emerge and whether such a plan would be any less punitive than what creditors are demanding.

Even if they do agree on some sort of bankruptcy, that may ultimately be ineffective or even make the situation worse, according to analysts cited in a New York Times article this week.

Meanwhile, the Supreme Court will review a ruling that blocked the island from restructuring more than $20 billion in public utility debt, an effort that bondholders including BlueMountain Capital oppose, according to Bloomberg Intelligence analyst Julia Winters. The high court will hear oral arguments on March 22, although the appeal may become moot if some deal is reached beforehand. 

That seems unlikely. Puerto Rico says it can't afford to wait around for a solution. And that's not an outrageous claim; it's facing a $2 billion bill for principal and interest payments on July 1, which it most likely won't be able to pay.

But it's not living up to that expression of urgency. Instead, it seems happy to wait until a bunch of different efforts shake out. That just won't work. Until Puerto Rico comes to the table with a plan that creditors will even start to consider, the pain will only get worse for the island.

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