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Hedge Fund Vultures to the Rescue in Puerto Rico

Hedge funds aren’t popular, but they’re perceived in some circles as the last, best hope for the island
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Is Puerto Rico America's Greece?

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Bring ice skates on your next trip to Puerto Rico. There’s a sweet public rink in Aguadilla that claims to be the only place to skate year-round in the Caribbean. “This is a great way to spend some time,” one tourism website says, “especially if it is raining, or it is too hot, or you are too sunburned to go to the beach.” It takes a lot of energy to maintain a skating rink in the tropics, but that’s not a problem: The Puerto Rico Electric Power Authority provides power to Aguadilla and other municipalities in lieu of paying taxes. It bills them if the value of the electricity exceeds what it owes in lieu of taxes. Aguadilla doesn't owe anything to Prepa. But a lot of Puerto Rican towns do owe the utility--and aren’t paying. Starved for revenue, Prepa is at risk of default on $9 billion in debt.

Unpaid power bills are only one reason to be pessimistic about the future of Puerto Rico. The self-governing U.S. territory is poorer than the poorest state, Mississippi. It’s bleeding population and running budget deficits. Its economy has been shrinking almost continuously since 2006, when a key U.S. tax break called Section 936 expired. Labor force participation is low. The government’s general obligation bonds have been downgraded to CCC+ (narrowly beating Prepa’s CCC–). And the population remains deeply split over the pivotal question of U.S. statehood, with its nonvoting representative in Congress crusading for it and the governor arguing for the status quo. At $72 billion, the debt of the island and its agencies exceeds that of every state except California and New York. A $630 million debt payment is due July 1. Friends are nowhere in sight. The rectangular island has been abandoned by most of the municipal bond funds that used to eat up its debt. Cut off from access to the debt market by its bad credit ratings, Puerto Rico seems about to founder on the high C’s.