Puerto Rico still seen
defaulting on debt even with rescue law
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[June 30, 2016]
By Daniel Bases
NEW YORK (Reuters) - Investors in Puerto Rico's debt-burdened economy
still face risks of default on some of the island's $70 billion in debt
even after the U.S. Congress on Wednesday created a powerful federal
oversight board to manage credit restructurings.
U.S. President Barack Obama says he will quickly sign the Puerto Rico
Oversight, Management, and Economic Stability Act (PROMESA) before the
U.S. territory faces a possible default on July 1 on $1.9 billion worth
of debt payments.
While the government of Puerto Rico says it cannot honor all of its
debts, and will likely default for a fourth time in the last year on
some of its bonds, some creditors could get their payments via insurers
or reserve funds.
"Regardless of the creation of the oversight board, the missed payments
on July 1 will constitute defaults," said Ted Hampton, senior credit
officer at Moody's Investors Service.
The July 1st payment includes roughly $780 million worth of General
Obligation (GO) bonds, its most senior credit that is supposed to be
paid out before all others.
"I expect they will not cover all of the GO payment. That would be their
first GO default in all of this, which is one reason why many people
involved at the U.S. Treasury, in Congress, in the government of Puerto
Rico saw a lot of urgency in enacting PROMESA before July 1," Hampton
According to Hampton, Puerto Rico has already missed approximately $562
million worth of debt payments through June 30th.
PROMESA provides the market with more clarity and lowers the chances of
a chaotic legal fight by providing a stay, or halt, to any creditor
litigation brought against the Puerto Rican government and its debt
issuing agencies that is retroactive to December.
If the control board, appointed by Obama with Congressional input, can
implement reforms, bring the island's financial situation under control,
and repay all of its debt, it will "enable Puerto Rico to be
self-sufficient and able to sell bonds in the future for its operating
and capital needs," Dick Larkin, credit analysis director at Stoever
Glass & Co.
PROMESA, a rare bi-partisan compromise, passed the Senate on Wednesday
by a vote of 68 to 30. The House of Representatives passed it on June 9.
INSURERS ON THE HOOK
The risk of defaults is not eliminated by PROMESA, but the reduction of
uncertainty is greatly welcomed after months of mostly dead-end talks
between creditors and the government.
"The reality is that for all of the negative catalysts that lie ahead,
credit markets and insurers are relieved that they now get to deal with
adults, that is talk with a control board, rather than the governor and
his staff," said Height Securities analyst Daniel Hanson.
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stock prices for the three publicly traded monoline insurance companies with
exposure to Puerto Rican debt rose as the likelihood of PROMESA passing
increased on Wednesday.
Hundreds of millions of dollars of Puerto Rico's July 1 payments are covered by
insurance, including about $364 million by Assured Guaranty, according to public
records and a company spokeswoman. About $184 million of that covers GO debt.
Assured has more than $5 billion in total Puerto Rico exposure. Its stock rose
3.56 percent to $24.67 per share.
MBIA's National Public Finance Guarantee reported that about $350 million of its
total $4.29 billion in Puerto Rico exposure comes due on July 1, including about
$173 million in GO bonds. Its stock gained 4.28 percent to $6.81 per share.
Ambac, which insures more than $2 billion of Puerto Rican bonds, is on the hook
for $122 million in principal and interest due on July 1, including some $40
million in GO or GO-guaranteed debt, according to the company's public
documents. Ambac shares climbed 5.10 percent to $15.84.
A spokesperson for Financial Guaranty Insurance Company (FGIC), which insures
more than $1 billion in total Puerto Rican debt, could not be immediately
reached on Wednesday.
Puerto Rico's benchmark 2035 General Obligation bond rose 1 full point in price
ahead of the final vote, to trade at 66.75 points, pushing the yield down to
Moody's rates this debt Caa3, which it believes implies creditors holding the
bonds will have a recovery rate in a range of 65 to 80 percent of principal and
"Dealing with PROMESA allows the insurers to trade some payments in the
short-run for higher recoveries in the long-run. Ultimately that is a better
business proposition for them than having to continue to limp along and never
reach a deal," said Hanson.
(Reporting By Daniel Bases in New York; Additional reporting by Nick Brown in
New York, Susan Cornwell and David Morgan in Washington, and Karen Pierog in
Chicago; Editing by Shri Navaratnam)
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