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00:00Let me start by asking you about playing Rico. Do you have . Are you holding Puerto Rican assets. Did you go to this meeting yesterday with Puerto Rican officials. And do you have any kind of clarity or visibility as to what's going on. So we do have some minimal exposure in Puerto Rico but we have names that really aren't subject to any type of clawback from the Commonwealth if there was some type of restructuring. For instance we own Puerto Rico housing Puerto Rico tobacco but very very minimal exposure. We did have representatives at the meeting. And third a third party question was around details very little yet. I think more details will emerge when the results of the working group are finished at the end of August . I think that'll be the first look you see at a proposal around restructuring the moratorium on debt service et cetera. We probably have to wait another month or so before we get a lot of details and prices and bonds react. PETER It is tough to predict at this early stage in these discussions but can you ballpark for us what the recovery rates would be for investors if there's a restructuring on that 72 billion dollars of Puerto Rican debt. So the I guess the two part answer the first part is that from a debt sustainability level of about 72 billion dollars in debt they need to get down to about 40 billion just if you think about the the economy there and if the economic assumptions even from ANNE KRUGER In this report are correct . So that's a pretty big haircut. What does that imply. Exactly right. 40 percent plus. So the second part of the answer is the complexity of that. You have Puerto Rico geos you have the sales tax you have electric on down 16 different issuers. So which ones take a bigger haircut versus those that take a smaller haircut and that's going to take some and that's what you want to get clarity on yesterday. But people didn't get as much clear. That's right. I think there was there was some frustration at the end of the meeting on the part of some investors. Because we don't have any exposure or it's minimal . We really didn't expect a lot of detail and weren't looking for that. But I think others were and they're going to have to probably wait another month that is going to be interesting . For instance the coffin of the sales tax bonds they have a strong lean on the sales tax. But will the Commonwealth attempt to claw those back in a restructuring and what's going to happen with all those you're going to get lawsuits and litigation and may drag on for a very long period of time. Do you think though going back to that question that at the end of the day let's say you had a slice of every variety of Puerto Rican debt that you would your blended haircut would end up being about 40 percent . I think that's about right. Wow. So 60 cents on the dollar is where Puerto Rico is going to end up paying roughly I think on average again Stephen Engle you're saying your ideal world right for Port ideal world for Puerto Rico basically you have to look at. I mean that is the bottom line is they have all this debt that they can't afford. How do you get out of debt. You need to grow your way out. They're not growing or you restructure . So from a point of view of its citizens it's the best outcome . Is there a pop singer type opportunity here. In other words what is the incentive for creditors to negotiate with the Commonwealth as opposed to just being a holdout. That's the interesting question here and I think that's why it'll be protracted because there is no mechanism for Puerto Rico. Right . What happens. They can't utilize Chapter 9 which states can either but municipalities can we saw what happened in Detroit . So the mechanism by a lot of crap is not obvious without a cramdown. That's exactly right. They can't force it down so it's can they really get creditors to the table in a very diverse set of creditors to the table to negotiate when everybody expects to get party having. Well I think it's going to take a lot of time but I think at the end of the day and maybe look back at New York in the 70s and the family had it all well off it's the analog but you take a look at the federal oversight board being appointed maybe that happens and that maybe is the impetus behind some type of of cramdown that might ultimately occur. They just can't afford to pay that . And at the end of the day they probably just say look we're not paying that service so we're not going to pay debt service you better come to the table and negotiate. I think that's probably the forcing element here. They're just going to they're going to hold out the fact they're going to hold a whole lot of credit now. I mean they're essentially insolvent. So they have to hold. They have no choice. You have to see much leaner and much better than what's going on in Greece much cleaner and much better. All right Mario Draghi. I'll trade you. Poor guy saw that Greece in a moment. I know and you apparently thought he was joking and Draghi said it wasn't a joke right. I guess from that element. Considering all the Eurozone participants and the approval and what's going on in Greece I suppose it is a little bit less complex but not a lot from our standpoint. Much cheaper cheap. You know I thought cheapening their protests outside the building yesterday which which said basically you know the banks always win. And you know Puerto Ricans have to pay the banks get away. But why do we always blame the creditors. I mean don't you realize when you borrow money that you're going to I have to pay it back or else there will be trouble. That's a great question. But I think it may be the thesis of this decade or the century is that and think about all the leverage that was created in the 90s this may be a consequence of that the leveraging the public the private sector deleveraged now the public sector is doing it and here we are we're faced with all this debt. That's what Puerto Rico essentially did they borrow they borrowed they borrowed . But yet people were looking at the demographics declining population an economy that's slowing you sort of had to see the writing on the wall. I mean we've been calling for this type of restructuring really since 2004 9/11. So I think it's somewhat obvious but that may be the unintended consequence here is that you just say you look at Detroit as a precedent is that they said initially yes state contracts can be impaired in a federal bankruptcy. What did they do. They treated pensioners better than bondholders. So again today it's the creditors and the bondholders that may suffer. It's all right. It's the lenders who are at fault in this .

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Hayes Sees 40 Percent 'Haircut' for Puerto Rico Creditors

Peter Hayes, head of municipal debt at BlackRock Inc., talks about Puerto Rico's plans to restructure the island’s $72 billion debt burden. He speaks with Matt Miller and Erik Schatzker on Bloomberg Television's "Market Makers." (Source: Bloomberg)

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