Puerto Rico Shifting From Markets to Politics Invites Distortion

  • Rhetoric ramps up with claims of ‘bailout’ and ‘vulture funds’
  • Congress is debating a plan to restructure $70 billion of debt

For the sleepy municipal-bond market, Puerto Rico’s escalating debt crisis -- and the political clamoring that’s coming with it -- is proving to be a double shot of espresso.

As Congress considers legislation to help the Caribbean island reduce its $70 billion of debt, the cacophony of rhetoric and misinformation is on the rise. A dark-money group ran advertisements urging people to “stop the Washington bailout,” even though the bill under debate provides no funding. The speaker of New York’s city council accused a mutual fund of hedge-fund tactics despite its two-decade-long investment in the commonwealth. Governor Alejandro Garcia Padilla is warning of a “humanitarian crisis” with revenue at a 10-year high.

The saga’s progression from the markets into the political sphere means there’s a lot more than just money on the line. Power and politics are also at play for elected leaders, presidential candidates and celebrities -- leading them to voice opinions. Complicating matters is the commonwealth’s unique status as a U.S. territory and the 17 different securities it issued along with its agencies -- factors that are well-known within the $3.7 trillion market, but mostly foreign to U.S. lawmakers.

Competing Interests

“This is the biggest, most complex, most confusing muni workout of all time,” said John Miller, co-head of fixed income in Chicago at Nuveen Asset Management, which oversees $110 billion of munis. He testified before the House Natural Resources Committee in April on a draft of the bill that sought to establish a debt-restructuring framework.

Politicians “are getting mired in the complexity of it, and they’re definitely getting peppered by all different kinds of constituencies with all different kinds of holdings, and perhaps manipulative messages,” Miller said. “It’s very fertile ground” to try to exert influence, he said.

With all the competing interests, progress has been slow on a bill to address Puerto Rico’s financial crisis, even though the island faces a crucial deadline on July 1, when it owes about $2 billion, including $805 million on constitutionally protected general obligations.

Two of the overarching questions addressed by the House Natural Resources Committee were whether the legislation -- a revised version of which was released late Wednesday --- was a “bailout” and whether struggling U.S. states could follow suit.

Those topics likely stemmed in part from an advertisement from the Center for Individual Freedom, released in Washington and the home districts of some representatives about a week before the committee heard testimony. It said that Illinois would want to follow Puerto Rico’s path, should the House pass the proposed legislation. It reinforced that message in another ad this week.

CFIF said in a statement that it never claimed that a bailout “would be funded directly by American taxpayers.” Rather, it would come as a result of losses incurred by individual investors and retirees across the country who own Puerto Rico bonds.

Rep. Rob Bishop of Utah, the Republican who chairs the committee, said in an interview that the ad was a “godsend.” It backfired because people called his office and learned more about the legislation.

A poll by Morning Consult supports that idea. The number of of registered voters who either strongly supported or somewhat supported congressional efforts to avert a default increased to 51 percent from 45 percent after the issues were explained to respondents, according to the survey, conducted from May 5 through May 9.

“The commercials that were thrown out there were so over the top and outrageous,” Bishop said. “There are so many voices out there that say this is not a bailout, there is no risk to the taxpayers. It makes it easy to refute.”

The commercial was singled out by during a segment last month on HBO’s Last Week Tonight with John Oliver.  So was OppenheimerFunds Inc.’s Maryland muni mutual fund, which, as of April 30, had 51.8 percent of its holdings in Puerto Rico. So were hedge funds.

Attacking OppenheimerFunds

“As much as 30 percent of Puerto Rican debt is now held by vulture funds,” Oliver said. “And if you are alone in the desert, and see vultures perched above you, your first thought is never ‘oh thank God,’ the vultures are coming to help.”

Within two weeks, New York City Council Speaker Melissa Mark-Viverito, a Democrat from San Juan, wrote a letter to the Securities and Exchange Commission asking to investigate OppenheimerFunds’s “hedge fund-like investment strategy.”

The problem with that assessment is that OppenheimerFunds has invested in the bonds for two decades, according to Krishna Memani, the firm’s chief investment officer. It bought many bonds at full value for their relatively high interest payments. Hedge funds, by contrast, were major buyers of Puerto Rico’s last big bond deal in 2014 and snapped up debt in the secondary market after prices plunged, betting they could sell at a higher price.

“We have been long-term investors in Puerto Rico, long before most other current holders of Puerto Rico debt arrived on the scene,” Memani said. “Despite all the posturing and diversity of stakeholders, we believe we can get to some sort of resolution.” 

Eric Koch, spokesman for Mark-Viverito, didn’t provide a further comment on the letter.

‘Humanitarian Crisis’

The speaker’s letter included a common refrain from the island’s government and proponents in Washington about the current situation: humanitarian crisis.

The characterization drew controversy this month after the local publication “El Vocero” quoted Puerto Rico’s Economic Development and Commerce Secretary Alberto Baco Bague as saying it’s a strategy to show the need for congressional action. 

The governor disagreed, saying the humanitarian crisis is “undeniable.” He has said Puerto Rico is defaulting on its debts to avoid cutting deeply into services provided to the island’s impoverished residents.

Among the biggest humanitarian crises of 2015, according to the non-profit World Vision, were the Syria refugee crisis, which has caused 4.4 million people to flee the country; the Nepal earthquake, which killed more than 8,000; and the West Africa Ebola outbreak, which lasted for 18 months, killing 11,300 in Sierra Leone, Guinea and Liberia.

Puerto Rico, for its part, has problems. People are leaving for the mainland U.S. at an accelerating pace, almost half of residents live in poverty and labor force participation has shrunk. 

On top of that, the first locally acquired case of Zika was reported on Dec. 31, the first person died from the virus there in April, and this month Puerto Rico had its first instance of microcephaly.

Yet elected officials began making the claim before Zika spread on the island.

As the commonwealth stares down the July 1 payment date, it’s experiencing higher-than-anticipated revenue. Puerto Rico’s collections from July through April came in $46 million above budgeted estimates and 2.9 percent higher than the same period a year ago. The revenue is on pace to total the most in at least a decade -- a statistic seemingly antithetical to a humanitarian and debt crisis.

“There seems to be an unlimited number of views and aspects to this story,” said Jim Colby, who runs the $1.9 billion VanEck Vectors High Yield Municipal Index exchange-traded fund. “All of that plays into the current environment of where there is misinformation, or where one side is stretching the truth of what reality is.”

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