Puerto Rico Researcher Seeks to Fill Government Data Gap

The slow pace of Puerto Rico’s official release of economic and fiscal data often leaves investors in the $3.7 trillion municipal-bond market starved for information and that led Antonio Sosa Pascual to create REOF Capital’s three-person research team to help plug those gaps.

About 50 companies have expressed interest in REOF’s products, less than a month after he set up the team, Sosa, the founder and managing director of the San Juan-based firm, said by telephone. He discussed the potential language barrier and the sudden drop in prices for Puerto Rico debt for today’s Bloomberg Brief: Municipal Market newsletter.

Q: Why start researching Puerto Rico municipal bonds now?

A: We saw an opportunity in the muni market in providing timely and objective information regarding the Puerto Rico bond market, which is undergoing a difficult and challenging time. There’s a gap in information between the U.S. investment community and what the government is providing.

I’m not happy about it. In a way, I wish there wasn’t a need for this. There’s sometimes a two-year time lag in issuance of financial reports, financial statements, and minutes of board meetings, which actually typically are not made public. Part of the job is to bridge that time gap between issuance of information and the time when people need it. That’s our challenge.

Q: What advantages do you get from being based in Puerto Rico, and how does that show up in your research?

A: A lot of things happening on a daily basis at the local level are conducted in Spanish, and some local media platforms don’t necessarily make it to the mainland. The main newspaper down here is in Spanish. Reports eventually make it to mainland media, but there is a time lag.

For government presentations like the one they did for the investor webcast on Oct. 15, that information is the summary of the summary of data, and a lot of that data takes a while to move up the bureaucracy.

We’re not only looking at what top management is saying, but we’re also looking at what the middle management at the more technical level is saying to understand what’s really going on.

Q: Would you say that reports in Spanish are the biggest barrier to fully understanding Puerto Rico’s politics and finances?

A: Language is an issue, but it’s not the only issue. It’s also understanding how these bureaucracies behave. The way that politics here works is really different. We know the different players, pressure points and leadership at different levels, not only from the entities themselves, but also the trade associations that influence the different entities.

It’s culture as well. The way media here communicates is not in the same way that it communicates in New York. You have to know what’s being said, and you have to determine out of those things what actually matters.

Q: Do you include buy and sell recommendations in your research?

A: At this point we’re not making recommendations. We’re just issuing information and pure research.

The way we’re doing that is through two products. One of them is an executive report, which is a four- or five-page document with our framework regarding our analysis. We’re giving weight to management at the entity level, and also factors like rating-downgrade possibility and credit-default possibility. We also are going to be looking at some policy issues that may influence the decisions of these entities. We’re also issuing an index report for institutions that need more information.

Q: What are you researching now?

A: We started with the recent Prepa revenue-bond issue, and we followed with Cofina. And now we’re looking at general obligations.

We look at the legal documents that make up the instrument. That’s our starting point, because in essence that’s the promise to pay. And then from there, we look at some official data, not only from local governments but what’s reported at the federal level. And then we use that to build our own conclusions.

Q: Do you think the sharp decline in Puerto Rico bonds that began in September was merited?

A: There’s a bit of hysteria. The financial condition of the commonwealth is not new. Most people knew that something was going on, something wasn’t right. Since last year, you’ve seen that some investment managers and buy- and sell-side people were issuing warnings to their clients.

I think what happened was anxiety over Fed policy suddenly combined with the Detroit bankruptcy and the issuance of the Prepa revenue bonds. The Prepa revenue-bond issue certainly had much higher yields, so that was a warning to the market that something wasn’t right.

There was a perfect storm of things happening at the mainland level, and at the local level, the government’s issues were still being figured out. They probably didn’t expect this tsunami.

Q: Do you think Puerto Rico officials are doing all they can to stabilize the situation?

A: They’re trying really hard, and they’re really good, honest people. They’re trying to do the right thing, but the problem is they have a ship that is seriously damaged.

What needs to be done are some serious structural changes, not only at the local level in terms of restructuring the agencies, but also in terms of the relationship between Puerto Rico and the United States. The way that’s structured right now does not provide the tools to get out of the situation.

Q: Will Puerto Rico’s debt have to be restructured?

A: There shouldn’t be a need for that. I don’t think the government is going to not pay. That’s what the governor has been emphasizing and what the objective is. He’s going to do what they have to do to make sure people do get paid.

Puerto Rico has never defaulted, so there’s no reason why we should do it now, but the truth is it’s a very fragile situation and in order to get out of it, it’s not just about pouring more money into it. It’s not restructuring debt. You need to look at structural issues because that’s the only space of opportunity that has not been explored.

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