As Puerto Rico Seeks to Slash Debt, Local Bondholders Await Hit

  • Island residents own at least $6 billion of government’s debt
  • Bondholders wait for new governor to chart course from crisis

There’s the hedge funds seeking to wrest what they’re owed from Puerto Rico, and then there’s thousands of local bondholders like Mercedes Pont.

Pont, 60, invested her savings in the island’s bonds, trusting they’d never default, and has counted on the income since she left her job in 2011 to care for her sick mother. But with the U.S. territory skipping payments on a growing share of its debt, her livelihood has been cast into doubt.

“I don’t know if I’ll ever even get the full payment,” she said in a telephone interview from San Juan. “I thought they were safe.”

Pont’s case highlights the balancing act facing Governor Ricardo Rossello as he begins talks with creditors in a bid to reduce the territory’s $70 billion debt. The prospect of billions of dollars of losses -- on debt that buyers were assured couldn’t even be written off in bankruptcy -- has set off a lobbying push by groups including Bonistas del Patio ("Backyard Bondholders" in English), which is trying to shelter Puerto Ricans from deep investment losses they say would deal another blow to the island’s already shrinking economy.

"We are the ones at the end of the day who are going to create the jobs to get out of this recession," said Rafael Rojo, a home builder and board president of Bonistas del Patio, which has about 60,000 members. "We are telling them not to underestimate the psychological impact on local businessmen who have put their life savings in government bonds."

Puerto Ricans were big lenders to their government, which borrowed year after year to pay bills as officials sought to avert deep spending cuts. While speculative investment funds became major bondholders as the government’s credit rating was dropped to junk, at least $6 billion was still held by island residents as of last year, according to one government estimate. That’s injected a local political wrinkle into already complex negotiations as Puerto Rico deals with holders of more than a dozen classes of debt backed by various revenue streams and legal protections.

The scale of the crisis -- and the threat of protracted court fights among creditors -- led the U.S. last year to install a federal oversight board with broad powers to review Puerto Rico’s budget and any debt-cutting deal. While former Governor Alejandro Garcia Padilla proposed a restructuring that would keep some interest payments flowing to island residents, it’s unclear if Rossello will follow a similar approach.

Favor Locals, Or Not?

“Right now we’re not trying to discriminate in terms of the negotiations between different groups," said Elias Sanchez, the governor’s representative to the oversight board, in a telephone interview. He said the administration is in the process of reviewing proposals submitted by various creditor groups, including Bonistas del Patio, as it works on a fiscal plan to be submitted to the control board by the end of this month.

Puerto Rico has sheltered local bondholders from some of the fallout by continuing to make payments due on sales-tax bonds, known as Cofinas. Locals hold at least $2.6 billion of that debt, more than any other type of security, according a report released by the government in October. Bonistas del Patio says the government’s figures are too low, estimating that local holdings are more than twice as large.

Their stake in the sales-tax debt has aligned local bondholders’ interests with investment firms that also own the securities and have been lobbying to keep the government from diverting the revenue elsewhere. In October, Bonistas del Patio held a meeting for bondholder groups at the Harvard Club in New York, and it has continued to hold discussions with other creditors.

Bondholders are currently waiting for Rossello’s plan, though there’s little doubt that they’ll wind up with less than they’re owed. The federal control board has estimated that Puerto Rico could cover just $800 million, or 21 percent, of its debt service in fiscal year 2019 even if it took steps to raise taxes and cut spending.

Even so, Pont, the local investor, said there’s renewed hope on the island that Rossello’s administration will reach a solution. She has been relying on the income she receives from the sales-tax bonds since the government stopped making payments due on other securities she holds.

“I try not to think about the future or things I cannot control,”  she said. “I will make due with whatever happens.”

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