Puerto Rico Said in Talks With Treasury to Restructure Debt

  • Commonwealth general-obligation bonds rise to highest in week
  • Proposal likely to face challenges in Washington, San Juan

Puerto Rico and U.S. officials are discussing the issuance of new bonds administered by the Treasury Department to help restructure the commonwealth’s $73 billion debt burden, according to a person familiar with the discussions.

Under a proposal, the Treasury would administer an account holding at least some of the island’s tax revenue, the Wall Street Journal reported earlier, citing people familiar. Funds in the account would be used to pay holders of the new security, which would be issued to existing Puerto Rico bondholders in exchange for outstanding debt at a negotiated ratio. Investors would receive less debt but would have higher expectations for getting repaid, the paper said.

"The administration has said repeatedly that it has no plans to provide a bailout to Puerto Rico, and it is inaccurate to suggest that Treasury is in talks to undertake any of Puerto Rico’s financial obligations.,” a Treasury spokesman said. “The administration has a dedicated a team to evaluate Puerto Rico’s fiscal outlook and provide expertise as Puerto Rico works to solve its fiscal challenges. Puerto Rico’s officials have routinely presented a range of ideas to help the commonwealth return to a sustainable economic path.”

Barbara Morgan, who represents the Government Development Bank at SKDKnickerbocker in New York, said the bank didn’t have a comment. Betsy Nazario, a spokeswoman in San Juan for the GDB didn’t respond to a phone message and e-mail.

Puerto Rico would likely face hurdles in the issuance of a new security. Governor Alejandro Garcia Padilla’s administration has faced a backlash from investors after he said in June that the commonwealth could no longer afford to pay its debts and proposed a restructuring plan that would leave bondholders with deep losses. Puerto Rico has also failed to gain support in Congress for legislation to allow its agencies to reorganize under Chapter 9 bankruptcy.

“They can’t do any of this without Congress,” said Brandon Barford, a partner at Beacon Policy Advisors LLC in Washington and a former Senate Banking Committee staffer. “There’s no appetite to do this from Republicans in Congress.”

Treasury taking over debt-restructuring talks between investors and Puerto Rico may mean steep losses for bondholders, said Matt Dalton, chief executive officer of Rye Brook, New York-based Belle Haven Investments. Treasury may tell investors how much they’re going to get back on their holdings rather than negotiate with bondholders over a haircut, he said.

“Bondholders are going to take a hit, for sure,” said Dalton, who manages $3 billion of municipal securities, including Puerto Rico debt. “You’re inviting the wolf into the chicken coop as far as I’m concerned.”

Puerto Rico’s borrowing costs have soared as investors demand high interest rates to lend money to the island. The commonwealth and its agencies racked up $73 billion by selling debt to balance budgets as its economy has failed to grow since 2006. Its population has declined by 7 percent in the past decade as people leave to find work on the U.S. mainland.

“They want to get Puerto Rico’s tax money away from Puerto Rico so they can securitize it and get ratings that are different from Puerto Rico’s,” said Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics.

Yields Decline

Whether investors will favor the debt exchange depends on how much of a loss they’ll have to take, said Daniel Solender, who oversees $17 billion, including Puerto Rico bonds, as head of state and local debt at Lord Abbett & Co. in Jersey City, New Jersey. 

“It’s nice if the federal government is getting involved,” Solender said. “That’s a positive sign, but there’s a whole bunch of issues that determine whether it’s a good deal.”

Commonwealth general obligations maturing in July 2038 traded after the article in a $60,000 customer sale at 64.8 cents on the dollar, the highest in a week, data compiled by Bloomberg show.

Puerto Rico sales-tax bonds due in August 2036 traded 16 times on the news, climbing to 46.9 cents on the dollar, the highest price since June, data compiled by Bloomberg show.

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