Puerto Rico Deal Is Only a Small Fix for $70 Billion Debt Crisisby , , and
Utility's tentative accord would be the first restructuring
Governor says bankruptcy would avoid costly, `chaotic' talks
Representative Nancy Pelosi, the leader of the House Democrats, took to the chamber’s floor on Friday morning and scorned Congress for not giving Puerto Rico the tools to cut its crippling debt.
Twelve hours earlier in New York, island officials and creditors reached a tentative agreement to begin doing just that.
The accord, if completed by bondholders and insurers, would reduce the $8.2 billion owed by Puerto Rico’s electric utility. It’s just a first step in the island’s struggle to escape from under a $70 billion debt burden, held by more than a dozen agencies -- a task so complex that Puerto Rican officials are lobbying Congress for the power to declare bankruptcy.
While the agreement reached late Thursday took more than a year to negotiate, the process was “relatively smooth because the interests were fairly aligned on both sides,” said Triet Nguyen, a managing director at NewOak Capital, a New York financial-advisory firm. “When you get to the rest of the debt complex it’s a much messier process.”
That’s why the deal by the Puerto Rico Electric Power Authority may mark only a brief respite in a crisis that’s been escalating for six months, as the island of 3.5 million rapidly runs out of cash and veers closer toward the first default on its guaranteed debt.
It could even happen before Pelosi and her Congressional colleagues return from their New Year recess, according to Puerto Rico Governor Alejandro Garcia Padilla, who said last week that the government may be unable to meet $957 million of interest payments due on Jan. 1. That includes general-obligation bonds that are given top priority under the law, as well as the electric utility’s debt.
Garcia Padilla made an unsuccessful last-ditch effort last week to secure help from U.S. lawmakers before the end of the year. House Speaker Paul Ryan said he will push committee chiefs to come up with a plan for Puerto Rico by the end of March. Pelosi and Democrats in the Senate have proposed measures that would shelter Puerto Rico from any lawsuits until then.
The agreement cut by the power authority, known as Prepa, could blunt Puerto Rico’s arguments in favor of allowing some of its agencies to file for Chapter 9 bankruptcy, an option that’s not open to it as a U.S. territory. The proposal has drawn opposition from bondholders and skepticism from Republicans who control Congress.
“The argument that’s been made in favor of Chapter 9 is that it’s the only means through which an organized, non-chaotic approach to Puerto Rico’s debt crisis can be put in place,” Mark Palmer, a managing director at BTIG LLC that analyzes Puerto Rico and municipal bond insurers, said in a telephone interview. Thursday’s agreement “would argue otherwise.”
‘Costly and Chaotic’
Garcia Padilla said renegotiating the government’s entire debt load would be far more difficult.
“The vast number of creditors with differing interests across all issuing entities would result in negotiations that are lengthy, costly and chaotic,” he said. “Access to legal, broad restructuring authority would allow us to undertake these in an orderly manner.”
Prepa had been negotiating since August 2014 with hedge funds and mutual funds including OppenheimerFunds Inc., who in November agreed to take losses of 15 percent. On Thursday, Prepa reached a tentative deal that includes bondholders and insurers MBIA Inc. and Assured Guaranty Ltd., which had been holdouts, according to two people with knowledge of the discussions.
The agreement, which hasn’t been finalized, came just two weeks before Prepa is scheduled to make a $196 million interest payment to bondholders. If it misses that payment, creditors could sue the agency to appoint a receiver and take over operations, said Palmer, the BTIG analyst.
Still Could Unravel
Late Friday, the utility said it extended a standstill agreement with creditors until Dec. 22 to give it more time to negotiate. Puerto Rico’s legislature would also still need to approve the final deal, and it could face legal challenges from other bondholders who don’t agree with the terms, said Phil Fischer, Bank of America Merrill Lynch’s head of municipal research.
While investors and analysts said they were encouraged by the Prepa agreement, they cautioned that it won’t automatically lead to a broader restructuring.
“Coming to a consensual agreement on the governmental debt is going to be really, really difficult,” said Peter Hayes, head of munis at New York-based BlackRock Inc., the world’s largest money manager.
The commonwealth’s bonds are issued by 17 different entities with varying degrees of risk. While Puerto Rico’s general-obligation bonds are given priority under its constitution, others are backed only by specific taxes or revenue. Creditors are gearing up for a fight over who gets paid first.
On Friday, prices of Puerto Rico’s most-active bonds were little changed, suggesting investors don’t see the previous day’s deal as a template for others. General obligations due in 2035 traded for an average of 72.4 cents on the dollar to yield 11.6 percent, the same as the day before. Puerto Rico sales-tax debt maturing in 2037 traded for an average of 37.5 cents, down from 38 cents a day earlier.
So far, legislation in Congress that would give Puerto Rico authority to restructure some debt in court, and boost the funding it receives under federal health-care programs, has failed to advance. Senator Orrin Hatch and two other Republican committee chiefs instead proposed extending $3 billion of aid in return for greater control over Puerto Rico’s finances, a measure that lawmakers may take up on their return.
Still, the Prepa accord, while just one piece of a complex puzzle, shouldn’t be downplayed, said Daniel Solender, who oversees about $17 billion, including commonwealth securities, as head of municipal debt at Lord Abbett & Co. in Jersey City, New Jersey.
“It’s positive they’re willing to negotiate,” Solender said. “Maybe they’ll try to do it elsewhere too.”