Puerto Rico still seen defaulting on debt
even with rescue law
Send a link to a friend
[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 said.
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.
The 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.
[to top of second column] |
Treasury Secretary Jack Lew (L) and Puerto Rico's Governor Alejandro
Garcia Padilla (2nd R) listen to kindergarden teacher Gloria Rivera
during their visit to the elementary school Eleonor Roosevelt in San
Juan, Puerto Rico, May 9, 2016. REUTERS/Alvin Baez -
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 12.663 percent..
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 interest.
"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)
[© 2016 Thomson Reuters. All rights
reserved.]
Copyright 2016 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |