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Debt service will consume less than 17 percent of Puerto Rico’s consolidated budget this fiscal year, according to an op-ed in today’s Wall Street Journal. In the general-fund budget, which does not include government-owned corporations and agencies, debt service is below 16 percent. Neither number sounds like grounds for declaring bankruptcy. Factor in all the fat in government spending that could be cut, and the case for walking away from obligations to creditors is even weaker, according to the commentary. Read more. (Subscription required.) 

In related news, an index of Puerto Rico bond yields reached a record high this week as investors remain unsure whether they’ll be paid on Dec. 1 and lawmakers in Washington, D.C., ponder extending a bankruptcy option to the cash-strapped commonwealth, Bloomberg News reported on Friday. Ten-year Puerto Rico general obligations yield 12.3 percent, the highest since at least January 2013 and up from 10.1 percent on Oct. 20, according to data compiled by Bloomberg. That’s 10.3 percentage points more than benchmark municipal bonds with the same maturity and equivalent to a 21.8 percent taxable interest rate for the highest earners. A spokesman for Governor Alejandro Garcia Padilla said on Thursday that while the commonwealth intends to meet its obligations, the government could run out of cash and will pay for essential services over creditors. That announcement came a week after the Obama administration proposed giving the commonwealth unprecedented authority to restructure its entire debt burden through bankruptcy protection, a proposal the governor endorses. Read more. 

For continuing news, analysis and information on Puerto Rico’s debt crisis, be sure to visit ABI’s “Puerto Rico” in distress webpage. 

Puerto Rico Government Development Bank’s disclosure of its available cash is leaving investors wondering if they’ll be paid on Dec. 1, Bloomberg News reported yesterday. The bank, which oversees the island’s borrowings, had $875 million of net liquidity as of Sept. 30, according to a posting Wednesday on the agency’s website. That’s more than twice the $354 million of principal and interest due in 33 days, with $276 million of the bonds guaranteed by the commonwealth. A spokesman for Puerto Rico’s governor reiterated Thursday that while the government plans to make its general-obligation bond payments, it may run out of cash in November and the administration will focus on providing essential services over paying creditors. Read more. 

In a related commentary yesterday by Bloomberg Views, to understand how Puerto Rico dug itself $73 billion in the hole, consider the highly attractive tax status of its bonds, which are exempt from local, state and federal taxes everywhere in the U.S. That exemption was granted by Congress in 1917 to help Puerto Rico develop. But without the financial controls Congress also imposed, which have long since been lifted, it's a standing invitation to fiscal misadventure, according to the commentary. Read more. 

For more news, analysis and commentary on Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

A bond default by Puerto Rico won’t derail the $3.7 trillion municipal-bond market as the investor base for the commonwealth’s securities has shifted to hedge funds from individuals and mutual funds, according to Tom Metzold, a managing director at National Public Finance Guarantee, which insures some of the debt, Bloomberg News reported yesterday. “Is Puerto Rico the first domino?” Metzold said. “The answer is no.” Negotiations between commonwealth officials and holders of some of Puerto Rico’s $73 billion of bonds fell apart last week. The administration of Governor Alejandro Garcia Padilla has said that it may run out of cash next month. Puerto Rico has about $720 million of bond payments due in December and January. “We’re obviously hoping very much that they don’t want to go nuclear and not pay that,” Metzold said. “We can assist, but we’re looking for a little give and take here so that potentially this can extend for a longer period of time.” Read more.

In related news, insurers of Puerto Rico Electric Power Authority bonds on Wednesday delivered terms for a debt restructuring to the utility, moving it a step closer to an accord with its last key creditor class, Reuters reported yesterday. The insurers have been negotiating to provide a surety bond to serve as a reserve fund to effect a broader debt restructuring with the utility's other creditors. Terms for the surety bond now need to be assessed by PREPA before a final deal can be struck. Insurers have taken center stage in talks to fix PREPA's balance sheet. Facing more than $8 billion in debt, PREPA reached deals in September with bondholders and lenders, who accepted 15 percent payment reductions in exchange for new bonds. Read more.

For further analysis of Puerto Rico’s debt crisis, be sure to visit ABI’s “Puerto Rico in Distress” webpage. 

Puerto Rico has little to gain from reforms that increase economic growth if the extra resources will all go to its creditors, according to a commentary from Larry Summers, a former treasury secretary and director of the National Economic Council in the White House, in today’s Washington Post. No individual creditor or group of creditors, even if they bought a claim for 30 cents on the dollar, is motivated to accept less than full payment as long as other creditors are going to be paid in full. First, Summers believes, Puerto Rico needs to adjust its policies so that its economy can compete in the modern world and its government has sustainable finances. Second, a realistic settlement needs to be reached where Puerto Rico is protected from its creditors and their claims are adjusted to realistic levels. An extension of the Bankruptcy Code to cover Puerto Rico is the centerpiece of the U.S. Treasury’s recent proposal. Other critics suggest that if Puerto Ricans just tighten their belts, all debts can be paid. This, according to the commentary, is absurd given the size of the commonwealth’s debts, the prices at which they are trading, and the rate of collapse of Puerto Rico’s economy. Read more. 

For more on Puerto Rico’s debt crisis, be sure to visit ABI’s “Puerto Rico in Distress” webpage. 

The municipal-bond market’s regulator is pressing the U.S. Securities and Exchange Commission to respond to the fast-growing market for bank loans, saying the agency needs to clarify whether they are covered by securities rules, Bloomberg News reported yesterday. The Municipal Securities Rulemaking Board wants the SEC to encourage or require disclosure of the obligations, as well as determine whether financial advisers that arrange such loans would have to register as a broker dealers. The board drafts securities rules that are enforced by the SEC. “It’s really important that investors have a full picture of an issuers’ indebtedness,” Lynnette Kelly, the board’s executive director, said yesterday. Direct lending by banks has proliferated in the $3.7 trillion market as states, local governments and nonprofits find they can borrow at rates comparable to those on bonds, without the fees tied to public-debt offerings. This year alone, Standard & Poor’s had evaluated 109 municipal bank loans totaling $4.22 billion by early October.

Last week, the Obama administration doubled down on efforts to aid Puerto Rico by proposing to change American law to allow the territory and its municipalities to seek bankruptcy protection, according to a commentary in The City Journal. The “Roadmap for Congressional Action” on Puerto Rico seems more calculated to embarrass Republicans than to find an actual solution to the deeply indebted island’s problems, according to the commentary. Republicans had serious concerns about previous Puerto Rico bailout proposals. Instead of dismissing it, Republicans should demand more substantial concessions on union-friendly federal policies that have helped deep-six Puerto Rico’s economy, according to the commentary. Read more. 

In related news, a group of investors holding Puerto Rico’s general-obligation bonds have hired restructuring adviser Goldin Associates LLC to represent them as the commonwealth seeks to reduce its debt burden, Bloomberg News reported yesterday. Goldin Associates will advise the general-obligation group in debt discussions. Puerto Rico and advisers to groups holding the island’s various bonds are set to meet today at Cleary Gottlieb Steen & Hamilton LLP’s New York office to discuss the island’s projected liquidity. The law firm has been representing the commonwealth in its plan to reduce its debt obligations. The general obligation bondholder group splintered from a broader coalition of more than three dozen firms that held $5.2 billion of Puerto Rico debt. Puerto Rico has $13 billion of general obligation debt which its constitution stipulates must be repaid before other expenses. The next payment to bondholders is $357 million of interest, due Jan. 1. Read more. 

For more on Puerto Rico’s debt crisis, be sure to visit ABI’s “Puerto Rico in Distress” webpage. 

Standard & Poor's on Friday maintained its “CC” rating on $47.5 billion of tax-backed Puerto Rican bonds, reflecting a negative outlook after the U.S. Treasury Department pushed Congress to pass laws to address the island's economic crisis, Reuters reported on Friday. The U.S. commonwealth, facing $72 billion in debt, has said that it could run out of cash by next June, and some analysts believe it will default as early as Dec. 1, when it owes a $355 million payment. Treasury's proposal, the Obama administration's first public directive on how to address the U.S. territory's problems, would allow the Puerto Rican government to file for bankruptcy, improve its Medicaid and Medicare funding levels, and extend earned income and child tax credits to the island. In a Friday statement, S&P said its rating "reflects our view that a default is highly likely, with or without enactment of this proposal." Read more. 

A messy Puerto Rico default is in nobody’s interest, which is why Congress ought to move swiftly to provide the American territory with a way to restructure its huge debt and revive its economy, according to a New York Times editorial yesterday. The Obama administration last week offered the outline of a rescue plan to help the island and the 3.5 million American citizens who live there. The plan would impose new oversight on the island’s finances and expand access to government programs like Medicaid and the earned-income tax credit. Crucially, it asks Congress to change the law so that Puerto Rico’s territorial government and its municipalities can seek bankruptcy protection. What investors must realize is that an orderly restructuring is a far better alternative than the long and complex legal battles that would inevitably follow a sudden default, according to the editorial. And if, in addition to reworking the bankruptcy law, Congress also created an oversight board, as the Obama administration recommends, investors could have some confidence that Puerto Rico’s politicians would make needed policy changes. Read the full editorial. 

For more news and analysis on Puerto Rico’s debt crisis, be sure to visit ABI’s “Puerto Rico in Distress” webpage. 

An Obama administration proposal aimed at stemming Puerto Rico’s spiraling fiscal crisis received a lukewarm reception before a hearing of the Senate Energy and Natural Resources Committee yesterday, with some Republicans asking for better data on the problem and some Democrats calling on the administration to show more ingenuity and urgency to solve it, the Washington Post reported yesterday. Speaking at a Senate hearing on the growing effect of the commonwealth’s economic crunch, a top Treasury Department official warned that the island’s debt crisis is morphing into a humanitarian one. “In the very near future, Puerto Rico will face impossible choices among providing essential public services, delivering promised pension benefits and paying its debt,” Antonio Weiss, the Treasury Department’s point person on Puerto Rico, told the Senate Committee on Energy and Natural Resources on Thursday. Weiss outlined a series of actions that the administration wanted Congress to consider to help Puerto Rico, which has been suffering through a decade-long recession and is buried under $73 billion in debt. He said lawmakers should create a new class of bankruptcy only available to U.S. territories that would allow Puerto Rico to restructure all of its debt. Sen. Lisa Murkowski (R­-Alaska), the committee’s chairman, said that she was sympathetic to Puerto Rico’s plight but needs verifiable numbers about the island’s finances before she can help craft a solution. Puerto Rico has not produced an audited financial statement in two years and, she said, other financial reports have come up with widely varying numbers for the island’s debt-service costs. Read more.

In related news, Puerto Rico officials have called a meeting next week with advisers to some of the island’s bondholders after the Obama administration pressed Congress to give the U.S. territory a boost in its debt-restructuring negotiations, Bloomberg News reported yesterday. Investment banks representing several sets of creditors have been invited to meet the restructuring officials on Tuesday at the New York office of Cleary Gottlieb Steen & Hamilton LLP, the law firm representing Puerto Rico in its debt-reduction efforts. The planned meeting follows a proposal released on Wednesday by the U.S. Treasury Department and two other federal agencies that calls for giving the commonwealth unprecedented authority in restructuring its $73 billion debt burden through bankruptcy protection. The plan has drawn criticism, with some participants in the municipal bond market referring to the powers Puerto Rico would get as "Super Chapter 9" because the island would be allowed to file for bankruptcy protection while U.S. states are not. Read more.

For the latest news and analysis on Puerto Rico’s debt crisis, be sure to visit ABI’s “Puerto Rico in Distress” webpage. 

With Puerto Rico buried in debt and on course to completely run out of money by the end of the year, the Obama administration is urging Congress to take unprecedented action to help the island, including granting a type of bankruptcy protection unavailable to the nation’s 50 states, the Washington Post reported today. The administration said that the broader bankruptcy protection, which would be available only to territories but not fiscally pressed states, is needed to help Puerto Rico avert a mushrooming crisis and restructure its $73 billion in debt. In addition to urging Congress to offer Puerto Rico this new type of bankruptcy protection, the administration is also recommending that Congress broaden access to the island’s Medicaid program, a move that would pump money into its teetering health care system. Finally, the administration said, Congress should install a control board to oversee the island’s finances­ and ensure that they are being handled in a responsible and transparent manner. The proposal comes in advance of a Senate Energy and Natural Resources Committee hearing today looking at Puerto Rico’s debt crisis. Read more. 

To read the Obama administration’s proposal, please click here. 

Rep. Pedro Pierluisi is set to testify at today’s hearing. For his statement on the Obama administration’s proposal, please click here.  Rep. Pierluisi is the invited keynote speaker for ABI's Winter Leadership Conference. Click here for more information and to register.

For more information on today’s Senate Energy and Natural Resources hearing at 10 a.m. ET, please click here. 

In related news, Puerto Rico’s Government Development Bank said that talks with a group of bondholders over a restructuring of the agency’s debt and potential financing have ended after they failed to reach an agreement, Bloomberg News reported yesterday. The development bank, which is closely tied to other government borrowers because it acts as a lender to the commonwealth and its localities, said in an e-mailed statement yesterday that it continues to focus on a broader restructuring that would allow bondholders to voluntarily exchange their securities for new ones. Read more.

For the latest news and analysis of Puerto Rico’s ongoing debt crisis, be sure to visit ABI’s “Puerto Rico in Distress” webpage.