Larry McDonald, senior director at Newedge, says Puerto Rico may threaten the $3.7 trillion municipal bond market.
The $3.7 trillion municipal bond market could be headed for a heap of trouble and it could all be triggered by events in Puerto Rico.
According to Larry McDonald, Senior Director at Newedge, Puerto Rico’s $53 billion of public debt ($160 billion – or $46,000 per person – if you add in other government debts and pension obligations), is making the commonwealth’s finances look eerily similar to that of Greece. And, says McDonald, Puerto Rico’s accounting is even less transparent than that of his old firm, Lehman Brothers, around the time of the financial crisis.
(Read: Puerto Rico passes teachers pension overhaul as unions protest)
Such accusations have raised the ire of Eduardo Bhatia, Puerto Rico’s Senate President. Bhatia and McDonald recently took to Twitter to debate Puerto Rico’s budget and debt situation. McDonald now talks to Talking Numbers about what he sees next for the commonwealth and what it means for the US muni bond market.
McDonald believes Puerto Rico will ultimately be able to sell additional bonds this coming February, though not at the levels they’d like.
«The government thinks it can sell $2 billion worth of paper,» says McDonald. «I think it’s going to be more like $500 million. It’s a real watershed moment because if they don’t sell this paper, the market is going to lose all confidence. But, I think they’re going to get the deal done.»
They type of bond McDonald sees Puerto Rico issuing in February will likely be a revenue bond rather than a general obligation bond.
(Watch: How Fed’s taper could change bond trade)
«I think this new bond that Puerto Rico is going to come up with is going to be a third lien with a claim on the sales tax revenues,» says McDonald, «a very interesting claim that’s going to keep some people comfortable. But, [its interest rates are] going to be way above the general obligation bonds.»
Puerto Rico was able to fund itself at relatively low rates in part because the Federal Reserve Bank’s quantitative easing policy brought yields lower, according to McDonald. Investors seeing slightly better returns were attracted to Puerto Rico’s debt in the same way they flocked to credit default obligations and sub-prime mortgage bonds when rates were low before the financial crisis, he says.
Later in 2014, Puerto Rico will likely restructure its entire debt in a workout similar to Greece, says McDonald. «I think it’s just completely unsustainable,» he says of the current situation.
To see more of McDonald’s take on Puerto Rico’s debt and what it means for the municipal bond markets, watch the video above.
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http://www.reuters.com/
Puerto Rico eyes debt sale amid reforms, investor worries
5:29pm EST
SAN JUAN, Jan 8 (Reuters) – Puerto Rico is readying a return to the U.S. municipal bond market as early as this month after shelving plans for a much-needed capital raising in the final quarter of last year amid a vicious selloff of its bonds.
Government Development Bank of Puerto Rico spokeswoman Betsy Nazario said that a bond deal will depend on market conditions but that plans are under way to return to the market later in January or in February. Puerto Rico bond prices have stabilized in recent weeks but remain at depressed levels.
Plans for the sale, which officials previously have estimated will range from $500 million to $1.2 billion, come as the Caribbean island’s government pursues fiscal reforms under the wary eyes of rating agencies worried about its wobbly finances.
It is part of a campaign by the commonwealth’s government to retain its investment-grade credit ratings despite concerns over its $70 billion debt load and weak economy that have sent yields on Puerto Rico bonds skyrocketing.
Three major U.S. credit agencies rate the commonwealth government’s general obligation and related debt at a single notch above junk debt. Two of them, and Moody’s Investors Service and Fitch Ratings, have put Puerto Rico on watch for potential downgrade.
Puerto Rico suffers from chronic budget gaps, an economy in or near recession for eight years, and interest rates far higher than those paid by any U.S. state. Yields shot up in 2013 on concerns about ratings cuts, with its 10-year yield now 700 basis points over a comparable AAA-rated muni bond.
On Wednesday, a 10-year Puerto Rico general obligation bond with a 5.25 percent coupon traded at 66.25 cents on the dollar to yield 10.63 percent. The bond had been trading near 63 cents on the dollar in late December.
Details of the deal were pending, Nazario said. But officials have said they will likely issue debt through Puerto Rico’s sales tax agency, one of its stronger-rated borrowers.
The sale would come after the Puerto Rico government passed reforms targeting the Teachers Pension Fund for public school teachers and another reform aimed at a separate retirement fund for the judicial branch of government. The reforms are being challenged in court and by teachers planning a strike.
Other reforms aimed at strengthening the government’s fiscal position will be taken up when the island’s legislature begins its new session on Jan. 14.
One measure would direct government entities to transfer about $2.8 billion in deposits from Puerto Rico’s private banks to the Government Development Bank (GDB) to shore up its liquidity. That is roughly 6 percent of the $47 billion on deposit in island banks as of Sept. 30, according to the Office of the Financial Institutions Commissioner. The measure also orders government agencies and public corporations to refinance their debts with the GDB, which has $9 billion in outstanding loans.
Another measure would cut town governments’ share of the 7 percent island sales and use tax (known as IVU) to 1 percent from 1.5 percent, with the extra 0.5 percent going to the central government.
Related legislation would create a GDB subsidiary called Municipal Finance Corp, based on the model established by the Sales Tax Financing Authority (known as Cofina), which appears to be the leading candidate for the imminent bond sale.
The new agency would control and distribute a portion of the IVU tax revenue granted to municipalities and issue bonds on their behalf. The proposals would eliminate plans to cut the IVU tax rate to 6.5 percent from 7 percent.
Island mayors have come out against the measures but are in talks with lawmakers on amendments to win support. House Speaker Jamie Perello predicted quick passage next week of the measures.
In signaling the potential for a downgrade to junk, Wall Street rating agencies say they worry over Puerto Rico’s access to capital because it turned to short-term borrowing recently.
Moody’s said last week it would be analyzing the «commonwealth’s ability and willingness to access long-term capital markets,» as well as GDB liquidity, budget performance and economic activity indicators.
A downgrade to junk by any agency would result in Puerto Rico having to repay about $1 billion in outstanding loans, through collateral calls and accelerated debt service terms, Moody’s said.
Island public school teachers plan a two-day strike next week over the reform of their pension plan, and the Puerto Rico Supreme Court is slated to hear oral arguments Jan. 15 in a challenge to the judicial system’s pension reform. (Reporting by a Reuters reporter in San Juan; Additional reporting and writing by Michael Connor in Miami; Editing by Steve Orlofsky)
Soto cuestiona plan económico de AGP
Soto expuso en su misiva al Gobernador que hay iniciativas legislativas que aumentarían los recaudos al fisco, como es el proyecto que busca establecer una tasa preferencial de pre pago de 5% en la contribución aplicable a las Cuentas de Retiro Individual (IRA).
“Diferentes funcionarios han estimado que la medida, pendiente a aprobación en el Senado, puede llegar a recaudar hasta $90 millones, dinero que llega sin imponer otro impuesto o afectar a los sectores productivos”, dijo Soto en su carta.
Abogó además por la reducción de gastos en el Gobierno “de una forma real y efectiva”.
“No hacerlo llevaría la situación fiscal del Gobierno a un hoyo todavía más profundo”, dijo Soto. “El aumentar los gastos gubernamentales, tal y como ustedes aprobaron en su presupuesto, en una situación fiscal como la que atravesamos es un acto de temeridad de consecuencias negativas insospechadas”.
Según Soto, la degradación del crédito de Puerto Rico es inminente y le reclamó al Gobernador no tener, a su entender, un plan concreto para paralizarla.
“Usted no tiene un plan concreto para evitar las nefastas consecuencias que acarrearía esa determinación”, dijo Soto. “La delegación del PNP ha propuesto soluciones y le ha advertido con tiempo los errores de sus políticas económicas, las cuales han agudizado nuestra precaria situación económica”.
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