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The losses from soured investments in Puerto Rico bonds are coming into focus for some of the world’s biggest mutual funds, and it is a brutal reckoning, the Wall Street Journal reported yesterday. The total red ink for mutual funds that invested in debt issued by the troubled island commonwealth is as much as $5.4 billion over the past five years, according to a Wall Street Journal analysis of mutual-fund holdings and municipal-bond trades. Those losses, which are both actual and unrealized, were tucked inside a wide range of funds managed by Franklin Resources Inc., OppenheimerFunds Inc., Vanguard Group, Goldman Sachs Asset Management, Western Asset Management Co., Lord, Abbett & Co., AllianceBernstein Holding and Dreyfus Corp., which is part of BNY Mellon Investment Management. The damage done to mutual-fund bets is one reason why a court-supervised restructuring of Puerto Rico’s debt that starts this week with a hearing in San Juan is expected to become such a lengthy battle. Many mutual-fund firms have greater incentive to agitate for maximum recovery — and have greater potential for losses — because they purchased debt closer to par values. Mutual funds as a group still hold about $14.6 billion of Puerto Rico’s $73 billion in outstanding bonds after selling off more than $9 billion over the past five years, according to research firm Morningstar Inc.

 

The money that Hartford, Conn., Mayor Luke Bronin needs to keep his city out of bankruptcy is more than a drop in the state budget bucket — but not that much more, the CT Mirror reported today. The $40 million extra that Bronin wants is one-fifth of 1 percent of the entire state budget. Put another way, the deficit in the next state budget is 57 times greater than Hartford’s ask. Connecticut will spend twice that much this year just to run its Department of Motor Vehicles. Hartford’s solvency may hinge on how Gov. Dannel P. Malloy and state legislators decide on whether Connecticut taxpayers can absorb another major tax hike next fiscal year. The math, and some state budget proposals already on record, suggest hundreds of millions of dollars of new revenue is needed to balance the books without gutting aid to all communities. The politics — of those who accept tax hikes as well as those who have ruled them out — suggest that it would be very difficult to get votes for a Hartford bailout when aid to most other communities is disappearing.

Puerto Rico’s creditors are preparing for a lengthy fight to maximize their recoveries after its slide into bankruptcy, but other Wall Street investors are rooting for the U.S. territory to succeed in driving down its $73 billion debt load, The Wall Street Journal reported yesterday. Creditors holding Puerto Rico’s municipal bonds argue that the territory won’t regain access to the high-yield credit markets if a court writes down the value of its bonds too deeply, according to court filings and congressional testimony. Puerto Rico was cut off from the credit markets in 2015, and restoring market access is a must for the federal oversight board handling its financial restructuring. But investors who don’t have bonds at risk in the court-supervised process are advocating an aggressive debt-restructuring to free up taxpayer resources for other purposes, such as infrastructure investments, and pave the way for its bonds to begin performing again. The more Puerto Rico is able to shrink its debt burden, the more money presumably will be available to pay back its restructured bonds, improving those securities’ performance in the market. Current creditors, on the other hand, say Puerto Rico should repay as much of its $73 billion in debt as it can to placate investors, reaffirm its willingness to pay and entice them to lend again. Yesterday, officials in Puerto Rico announced that its bankruptcy proceedings will begin on May 17 in San Juan with a series of requests for managing the case as the Commonwealth starts the process of restructuring its $70 billion in debt under Title III of PROMESA. The bankruptcy will be overseen by U.S. District Judge Laura Taylor Swain of the Southern District of New York.

 

The city's top attorney sought to quell fears about bankruptcy Wednesday by telling council members that Hartford, Conn., is far from ready to seek protection under chapter 9, the Hartford Courant reported yesterday. Howard Rifkin, Hartford's corporation counsel, acknowledged that he had begun discussions with firms specializing in bankruptcy and financial restructuring. But he said the city isn't yet prepared to move forward with a filing. City leaders had solicited proposals from law firms with expertise in chapter 9 protection. Given Hartford's financial struggles and uncertainty at the state level, Mayor Luke Bronin said, "It shouldn't surprise anyone that we might engage counsel in the near future." The city faces a $65 million deficit next year and a $14 million shortfall this year. Bronin has suggested cuts and concessions from the unions, but is still seeking $40 million in additional state aid to close next year's budget gap. With only weeks left in the legislative session, it's unclear if the General Assembly will come up with more money for Hartford. The state has its own problems — a more than $2 billion budget deficit is estimated for next year. To complicate matters, Gov. Dannel Malloy has proposed withholding town aid next month, meaning that Hartford would get $2 million less from the state.

Proposed spending for the fiscal year that starts in July will follow the court-approved bankruptcy plan, with slightly more revenues than expenditures, except that the city doesn’t expect to be able to hire police as fast as the budget calls for, the San Bernardino County (Calif.) Sun reported yesterday. A workshop, the first of several planned before the city council votes on the budget for the 2017-18 fiscal year, set out a plan for minimal increases in most departments, as total revenue is expected to climb to $119.86 million, an increase of about $7 million from last year’s budget. Residents and city officials consistently list public safety as a top priority, and a five-year plan to increase spending on police is a centerpiece of the city’s bankruptcy exit plan, which was officially confirmed in February. While the police department budget — more than 60 percent of the total general fund budget — does call for a significant increase in hiring, recruiting and retaining officers is more of a limit than dollars. That would mean close to 260 sworn officers on the force a year from now. The budget also calls for $1.3 million to replace police vehicles.

Puerto Rico's benchmark general obligation (GO) debt price fell to a record low in light trading as the prospect of a drawn-out restructuring of the island's $70 billion debt load spurred selling, Reuters reported yesterday. A mixture of small odd-lot trades, combined with a few larger block trades, left the price on the defaulted benchmark 2035 GO bonds below a bid price of 60, its lowest price since the $3.5 billion issue was sold in March 2014. The bid price on the bonds, which were sold with an 8 percent coupon, fell as low as 58.45 points before settling around 59.41 late on Tuesday. The larger block trades, which mixed in between the odd-lot trades, briefly lifted bid prices into the 61.75/62 range before settling lower.

There has been an exodus of families from Puerto Rico in the face of its economic collapse, so Luis Santaella School has a big problem: Only 146 children are enrolled compared with about 250 in the past, The New York Times reported today. Like 178 other schools across the island, it is set to close after the last day of the school term this week, in part to help Puerto Rico battle a $123 billion debt. The school will join the many casualties of a fiscal crisis that forced Puerto Rico to declare a form of bankruptcy last week and caused hundreds of thousands of people to leave the island in the past decade. The school will join the shuttered businesses and abandoned homes as yet another indicator of the emergency gripping Puerto Rico and the desperate efforts to stop the hemorrhaging. For some, the closings represent not just another chip at Puerto Rico’s national budget, but also an opportunity to transform a struggling education system in which some schools are infested with termites, enrollment has dropped by nearly a third since 2010, and just 10 percent of eighth graders passed the standardized math test. But for parents, the cuts feel both catastrophic and capricious. The oversight board has warned that the government must save up to $40 million a month, suggesting that about 300 schools close and that teachers be furloughed two days a month. The plan is less draconian than the one the fiscal board had suggested. The consolidation is not just about saving money, but improving student performance and empowering local officials to be accountable for what happens at their schools. If two $1 million schools merge, the new $2 million school can afford computer labs that twice as many students could use.

 

As Puerto Rico filed the largest municipal bond bankruptcy in U.S. history last week, many believe that all Congress needs to do is take a step back and let the process work itself out. Others are also under the false impression that merely allowing the Financial Control Board set up under the Puerto Rico Oversight, Management, and Economic Stability Act will provide the necessary independence and structural reforms for the economy to magically bounce back after more than a decade of negative growth. Unfortunately, nothing could be further from the truth, according to a commentary in The Hill yesterday. The reality is that unlike other major debt-restructuring cases in the U.S. and worldwide, Puerto Rico’s 10-year-plus economic depression is directly correlated to congressional policies that harmed the Commonwealth’s economy. It was Congress and the ruling political party in Puerto Rico at the time that decided to phase out Section 936 of the Internal Revenue Code, a decision that provoked the loss of 75,000 manufacturing jobs over the following decade. The inability to foster alternative economic strategies to mitigate the loss of federal tax incentives, and ill-advised spending decisions by the island’s politicians, aggravated the situation. Therefore, according to the commentary, reasonable and responsible remedies need to be put in place to correct this damage. Helping Puerto Rico now would save money to states and the federal government. Puerto Ricans, as U.S. citizens by birth, are moving at an accelerated pace to live in the states. If economic conditions do not improve soon, this trend is projected to increase even further, continuing to erode the tax base of the Commonwealth and leaving behind an aging population without the workforce it needs to grow.