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The Puerto Rico Electric Power Authority, the island’s main electricity provider, has entered into a debt-exchange agreement with some of its bondholders and hedge funds that puts the utility a step closer to reducing its $8.3 billion debt load, Bloomberg News reported yesterday. The accord wraps up a preliminary pact unveiled in September that calls for investors to take losses of as much as 15 percent in the transaction, according to a statement Thursday from the utility, known as PREPA. The pact stipulates that legislation authorizing the debt restructuring that was introduced this week must be passed in November and that the exchange must be executed by June 30, 2016, according to a statement from the bondholder group. Hedge funds and municipal mutual funds holding about 35 percent of the agency’s bonds, fuel-line lenders and the Government Development Bank, which lends to the island’s agencies, signed on to the final pact. The agreement doesn’t include bond-insurance companies MBIA Inc., Assured Guaranty Ltd. and Syncora Guarantee Inc., which guarantee about $2.5 billion of the utility debt against default. Read more. 

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

Hedge funds’ involvement in the Puerto Rico debt crisis is leading U.S. Representative Nydia Velazquez (D-N.Y.) to propose legislation that would force the firms to reveal more about their investments, Bloomberg News reported yesterday. Velazquez, who sits on House Financial Services Committee, wants hedge funds to file with the Securities and Exchange Commission whenever they acquire at least 1 percent of a company’s stock, down from the current 5 percent threshold. The bill she has drafted would apply the same disclosure requirement to debt and derivatives. Hedge funds have drawn scrutiny for snapping up Puerto Rico bonds, whose prices have tumbled as the island’s fiscal crisis escalated. Velazquez said that the funds may be advocating for spending cuts that would hurt Puerto Ricans and against legislation that would let some agencies file for bankruptcy, which would allow them to cut their debts in U.S. court. Read more. 

In related news, Puerto Rico Governor Alejandro Garcia Padilla’s administration sent to the island’s legislature a bill that would give its main electricity provider power to restructure about $8.3 billion of debt, Bloomberg News reported yesterday. The Puerto Rico Electric Power Authority, known as PREPA, has been negotiating since August 2014 with its creditors on how to ease the utility’s debt payments and modernize a system that relies heavily on crude oil to produce electricity. PREPA faces a $1 billion shortfall for the fiscal year ending June 30, 2016, according to the governor’s legislation. The utility has a $196 million interest payment due to bondholders on Jan. 1. Read more. 

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

The Obama administration released its Puerto Rico plan last week to give the entire Commonwealth of Puerto Rico the ability to file for chapter 9 bankruptcy to deal with its debt crisis. Any bankruptcy bill for Puerto Rico would punish retirees whose pension funds invested in these bonds because they were tax-free, had strong security and were explicitly protected from chapter 9, according to a commentary by former governor and U.S. Senator Judd Gregg in The Hill yesterday. Conversely, it would reward Puerto Rico and its politicians for years of irresponsible spending and poor fiscal policy, according to Gregg. Equally significant is the implication of this new type of chapter 9 for American investors in the near-future. Illinois, New Jersey, Pennsylvania, Connecticut are among the states with large unfunded liabilities facing fiscal crises — and the list is growing at an alarming speed, according to Gregg. If such a protection were extended to Puerto Rico, he asks, why wouldn’t those states expect equal access to this new form of chapter 9? Read more. 

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

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.