Christopher Gregory/Getty ImagesVacant buildings in an exclusive San Juan neighborhood.
Puerto Rico, which is battling a financial crisis of high unemployment and a crushing debt load, is under pressure to show investors and credit-rating agencies that it can still borrow money from the capital markets.
A group of hedge funds and private equity firms may help it do just that, but at a high price.
Bankers at Morgan Stanley have been reaching out to about a dozen hedge funds, private equity firms and other large investors to gauge their interest in providing up to $2 billion in financing to Puerto Rico, according to people briefed on the discussions.
The talks are fluid, but one of these people, who spoke on the condition of anonymity, said the debt could carry yields as high as 10 percent, more than double what a highly rated city or state pays to borrow in the current municipal debt market.
The proposed financing shows just how dire Puerto Rico’s situation has become. “It’s unprecedented,” said Robert Donahue, managing director at Municipal Market Advisors. “It’s a reflection of the increasing realization that Puerto Rico has exceeded the risk appetite of the traditional municipal bond market.”
A spokesman for the Government Development Bank for Puerto Rico, which oversees debt deals for the island, declined to comment. A Morgan Stanley spokeswoman also declined.
Christopher Gregory/Getty ImagesCruise ships docked in Old San Juan, a tourist center in the capital. The island is battling a big debt load and high unemployment.
Investors have been driving down prices of the island’s bonds in recent months, fearing Puerto Rico could default on its outstanding debts. Hedge funds have already been buying Puerto Rico debt at steep discounts, but in relatively small amounts.
The proposed debt deal being cobbled together by Morgan Stanley would be among the largest wagers on Puerto Rico — if not the entire municipal debt market — by hedge funds and other so-called alternative investment firms. Hedge funds are big buyers of debt and stocks of troubled companies, but they are relative newcomers to municipal bonds.
Puerto Rico’s persistent financial problems have taken on a new urgency. Last month, Moody’s Investors Service said it was putting Puerto Rico’s credit rating on review for a downgrade. A one-notch downgrade by any of the ratings agencies could have painful consequences. About $1 billion of debt repayments would be accelerated and additional collateral would have to be posted for interest rate swaps, according to Moody’s, which now rates Puerto Rico Baa3, one notch above junk.
Officials in Puerto Rico have insisted that there is ample liquidity to last through the end of the government’s fiscal year, June 30, without additional borrowing. They say they have made progress on increasing tax revenue and cutting pension liabilities.
Still, Moody’s is prodding Puerto Rico to tap the debt market before the end of the month — which would show that it can do so under financial strain.
“An inability or unwillingness to access the market in January 2014 would be a negative rating factor” for Puerto Rico, Moody’s said in a research note just before Christmas.
The people briefed on the proposed financing said Morgan Stanley had not been hired by Puerto Rico to underwrite a deal. Rather, the bankers are acting on their own to put together a proposal to take to Puerto Rican officials.
The people said the bank’s strategy was to line up buyers before Puerto Rico sold the bonds. Analysts say that if any bond sale failed to attract enough investors, it would send a dangerous signal to the broader market.
Puerto Rican officials have discussed other possible bond deals, including selling debt backed by sales tax revenue. Such deals could come by the end of February.
Moody’s said the new debt could be used to help close an $820 million budget gap and repay various short-term debts that financed last year’s budget deficit.
While selling bonds in the municipal debt markets is a vital financing source for many states and cities, Puerto Rico has come to depend on debt to keep the government operating. For decades, the commonwealth has found near limitless demand for its bonds, which carry interest that is exempt from federal, city and state taxes, making them attractive investments for residents of the United States mainland.
The last Puerto Rican government entity to borrow in the municipal market was the island’s electrical authority, which sold $673 million in bonds last August at yields of about 7 percent. Since then, investors have grown more skittish about the prospect of a default by Puerto Rico, and their fears were heightened by Detroit’s bankruptcy filing.
As a commonwealth of the United States, Puerto Rico cannot file for Chapter 9 federal bankruptcy protection. But some investors fear that the lack of a court-supervised bankruptcy process could lead to a free-for-all among Puerto Rico’s creditors or the need for a bailout from a reluctant federal government.
Such fears caused traditional holders of Puerto Rico bonds —mutual funds and wealthy individuals — to sell their bonds. That’s when hedge funds stepped in as buyers, betting that default concerns were overblown.
“I don’t think the commonwealth is near the precipice,” said David D. Tawil, co-founder of the hedge fund Maglan Capital, which owns some Puerto Rico debt. “They still have some arrows left in the quiver before they have to resort to restructuring.”
Yields on Puerto Rico’s 30-year general obligation bonds are now at 8.6 percent, according to Thomson Reuters Municipal Market Data. By comparison, yields on a benchmark of highly rated municipal bonds are 3.9 percent.
Some investors may have been too early in betting on Puerto Rico’s recovery.
In a letter to investors on Tuesday, Third Point, the hedge fund run by Daniel S. Loeb, said Puerto Rico bonds were among his firm’s top five losing investments in the fourth quarter.
24 de enero de 2014 12:13 p.m.Actualidad
Gobierno se prepara ante la eventualidad de una degradación
«Planificamos para todo, para lo bueno y para lo malo», dice secretaria de Hacienda
Por Joanisabel González / joanisabel.gonzalez@elnuevodia.com
“Esperamos que no suceda (la degradación), pero si sucede, actuaremos responsablemente», sostuvo Acosta.
La secretaria de Hacienda, Melba Acosta, y el presidente de la junta de directores del Banco Gubernamental de Fomento (BGF), David H. Chafey, señalaron hoy que la administración se prepara para acudir al mercado de bonos en los próximos meses, probablemente en febrero.
También señalaron que hacen todo lo posible para evitar una degradación del crédito de la Isla y que han tomado medidas contundentes para atender los problemas de la Isla, incluyendo el déficit presupuestario y los planes de pensiones.
Empero, ambos funcionarios también aceptaron que la administración de Alejandro García Padilla también se prepara para tomar «medidas adicionales» si Moody’s Investors Service o alguna otra casa crediticia degrada a Puerto Rico a rango especulativo o chatarra en el futuro cercano.
“El 2013 fue un año bien difícil. Todavía tenemos que articular otras medidas fiscales adicionales. Estamos haciendo todo lo que podemos para no ser degradados”, dijo Acosta Febo en una entrevista televisada desde El Morro a través de la cadena CNBC.
“Esperamos que no suceda (la degradación), pero si sucede, actuaremos responsablemente. Tomaremos medidas adicionales. Ciertamente, planificamos para todo, para lo bueno y para lo malo. Estamos preparados para un evento como ese”, sostuvo Acosta.
La entrevista de Acosta y Chafey con la reportera de CNBC, Michelle Caruso Cabrera, representa la primera aparición pública del equipo fiscal de la administración García Padilla en medios especializados estadounidenses y se produce a solo días de que Acosta y Chafey viajen a La Gran Manzana a reunirse con las casas acreditadoras.
Según Chafey, Puerto Rico acudiría al mercado de bonos en algún momento del mes de febrero y si el mercado determina un precio de alto rendimiento estarán dispuestos a negociarlo.
“Si eso es lo que se requiere está bien con nosotros”, dijo Chafey cuando Caruso Cabrera le preguntó cuál sería el precio correcto para entrar al mercado. Los bonos del Gobierno central de Puerto Rico o Gos han traficado consistentemente entre 8% y poco más de 9% durante la segunda mitad del 2013.
Puerto Rico encara una posibilidad real de degradación por segunda vez en menos de cinco años, particularmente luego de que Moody’s colocara el crédito de la Isla en observación para degradación en diciembre.
El plazo de 90 días otorgado por Moody’s vence el próximo 11 de febrero.
Why Puerto Rico needs to borrow money—and soon
Published: Friday, 24 Jan 2014 | 1:06 PM ET
Problems in Puerto Rico: Debt crisis looms
Friday, 24 Jan 2014 | 10:43 AM ET
Puerto Rico Treasury Secretary Melba Acosta, and PR Government Development Bank Chairman David Chafey, discuss the pressure Puerto Rico is under from ratings agencies to borrow from markets over concerns of short-term liquidity needs. Puerto Rico has $70 billion in debt plus unfunded liabilities of $30 billion.
Puerto Rico is in an epic struggle to borrow money from the markets, and the clock is ticking.
The island, a territory of the United States, is in the midst of a debt crisis. With only 3.7 million people, it owes an eye-watering $70 billion in public debt, behind only New York and California. And much of that debt is widely held by American investors in municipal bond funds.
In theory, Puerto Rico should be borrowing less, not more. But ratings agency Moody’s is concerned about a near-term liquidity shortfall—a lack of breathing room, so to speak, when it comes to covering what is budgeted to be an $820 million budget deficit this year.
(Read more: Puerto Rico approves measures to manage debt load)
On Dec. 23 Moody’s wrote «An inability or unwillingness to access the market in January 2014 would be a negative rating factor.» In other words, not borrowing money, or better said, not being able to, could lead them to downgrade Puerto Rico’s debt, which would put the island at junk bond status.
The chairman of the Government Development Bank, David Chafey, told investors in October that liquidity in fiscal year 2014 would not be a problem, and that the island could get through the entire year without borrowing if it had to. Chafey and Puerto Rico Treasury Secretary Melba Acosta told CNBC that the island will go to market in the next month.
«We are preparing to go to market,» Chafey told CNBC. «There are additional moves we took this week to demonstrate additional fiscal responsibility. Therefore, timing is some time in the month of February.»
Getty Images
A vacant building in the Santurce neighborhood of San Juan, Puerto Rico.
But Moody’s isn’t giving Puerto Rico that much time. The firm wants to see some of the expensive short-term debt refinanced into longer-term debt. Think of it like refinancing a 15-year mortgage into a 30-year mortgage; yes, the interest rate is higher, but the monthly payments are much lower, making it easier to manage cash flow.
But there’s also a possible Catch-22: If the interest rate Puerto Rico has to pay is considered too high, that too could spark a downgrade.
(Read more: White House: No bailout for Puerto Rico)
A downgrade isn’t just an issue of pride, it’s an issue of money. Moody’s estimates that if Puerto Rico does get downgraded to junk status, it faces $1 billion in additional short-term costs due to collateral calls on loans that are contingent on Puerto Rico not being rated junk.
Nearly 70 percent of U.S. municipal bond funds rated by Morningstar have some kind of exposure to Puerto Rico. That’s because the island’s bonds have what’s known as «triple exemption.» No matter what state you live in, if you own a Puerto Rico bond, you don’t pay federal, state or local taxes on the interest.
In the meantime, the island is racing to make changes that will lead to long-term improvements in its fiscal picture. As in all debt crises, taxes and fees have gone up on nearly everything and everyone. Personal income taxes, corporate taxes, sales taxes, sin taxes, even taxes on insurance premiums have been hiked or newly imposed.
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Should Puerto Rico be allowed to borrow?
Puerto Rico is under pressure from ratings agencies to prove they can borrow money or face a downgrade, reports CNBC’s Michelle Caruso-Cabrera.
Water rates were hiked by 67 percent in order to improve the solvency of the water company. Government workers and teachers are facing cuts to their pensions. Teachers went on strike for two days and protested after the retirement age was raised from as low as 47 to at least 55 for current teachers, and 62 for new teachers.
Despite numbers that look incredibly frightening, there are bulls on Puerto Rican debt. Well-known investor James Grant told investors in his newsletter in October and again in early January that he is bullish on certain Puerto Rico bonds, but only for investors who can stomach the risk.
«The question before the house is whether qualified investors … are being properly compensated for the anxious days and sleepless nights that may lie ahead. ‘Yes,’ we continue to believe,» he wrote on Jan. 10.
(Read more: Puerto Rico eyes debt sale amid reforms, investor worries)
Just because an investor is bullish on the debt doesn’t mean they don’t think there will be a restructuring of some kind. Jonathan Carmel, of Carmel Asset Management, said that some bonds are selling at 60 cents on the dollar and he thinks, in the event of a restructuring, they are worth 80 cents.
It’s worth noting that the menu of Puerto Rican bonds is hugely varied, and not all have the same level of risk. Hedge funds and municipal bond funds are picking and choosing those that they think are most likely to get paid back.
«Cofina» bonds, which are backed by a dedicated sales tax, are frequently recommended. Back in April, Barclays told investors Cofina bonds were undervalued and provided «high income for the rating level with an outsize potential for price appreciation.»
Hedge fund manager Kyle Bass told CNBC last year that he thinks there is a write-down of 90 percent on some bonds in Puerto Rico.
—By CNBC’s Michelle Caruso-Cabrera. Follow her on Twitter
@MCaruso_Cabrera
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REGIONAL NEWS
S&P Completes Encirclement of Puerto Rico
Standard & Poor’s put Puerto Rico’s barely investment grade general obligation rating on rating watch negative, completing the ratings agencies’ encirclement of the commonwealth’s GO rating.
Following S&P’s decision, announced late Friday, all three agencies now are reviewing the commonwealth’s BBB-minus or equivalent GO ratings for a possible cut to a speculative grade.
S&P focused on what it said was lowered cash reserves at the Government Development Bank of Puerto Rico, which lends money to Puerto Rico government bodies and public corporations, among other responsibilities.
The «GDB could have limited liquidity by fiscal year-end June 30, 2014 without access to the debt market by either GDB or the commonwealth,» S&P analysts David Hitchcock and Horacio Aldrete-Sanchez said. «While we believe the commonwealth may place a sizable sales-tax secured bond issue through COFINA [Puerto Rico Sales Tax Finance Corp.], in our opinion, current market conditions for Puerto Rico debt issuances will require relatively high yields and a limited pool of specialized buyers.»
S&P put on credit watch negative the bonds of the GDB, Puerto Rico Industrial Development Authority, Puerto Rico Highways and Transportation Authority, Puerto Rico Convention Center District Authority, the University of Puerto Rico, and Puerto Rico Employee Retirement System.
It placed on negative watch the commonwealth-guaranteed bonds of the Puerto Rico Aqueduct and Sewer Authority. These are about $1.1 billion of PRASA’s total $4.6 billion in debt. S&P has a stable outlook on the rest of PRASA’s debt.
It put a negative outlook on the BBB rating of the Puerto Rico Electric Power Authority.
GDB interim president José Pagán Beauchamp reiterated his defense of the island’s investment grade ratings.
«As we have stated publicly, the GDB and the Commonwealth of Puerto Rico are comfortable with current liquidity levels and have a variety of options for raising additional liquidity, including a planned return to the public debt markets in the near term. S&P is correct in noting that Puerto Rico’s constitution guarantees the payment of GO debt and Puerto Rico will continue to do everything necessary to honor all of its commitments.»
Pagán continued, «Our administration is continuing its focus on creating sustainable economic growth through job creation, making ongoing progress towards our goal of a structural budget balance by fiscal 2016, and further strengthening our credit profile, market access and liquidity.»
Municipal Market Advisors managing director Robert Donahue said he questioned the health of the GDB.
«MMA believes that GDB’s leadership has done a poor job satisfying investors and rating agencies questions regarding the bank’s liquidity position, offering only vague pronouncements of adequacy,» he wrote in MMA’s Weekly Outlook. «The imminent release of GDB’s fiscal year 2013 financial statements (released in mid-February last year) will provide real numbers and context.»
S&P rates the GDB debt BBB-minus long term and A-3 short-term; the Industrial Development Authority bonds BBB-minus; the Highway and Transportation Authority highway revenue bonds BBB-plus, the HTA’s transportation revenue bonds BBB and the HTA’s subordinate revenue bonds BBB-minus; the Convention Center District Authority bonds BBB-plus; University of Puerto Rico bonds BBB-minus; and the Employee Retirement System bonds BBB-minus. Some of these authorities’ bonds have higher ratings because they are protected with insurance.
S&P didn’t put its A-plus rating on the COFINA bonds on negative watch. However, S&P does have a negative outlook on the bonds.
Meanwhile, a deadline from Moody’s Investors Service for a Puerto Rico bond sale is approaching fast. On Dec. 23 Moody’s said, «An inability or unwillingness to access the market in January 2014 would be a negative rating factor.»
GDB Chairman David Chafey told CNBC last week that Puerto Rico planned to sell a bond in February.
Triet Nguyen in Muninetguide.com commented, «the rating agencies’ fixation on PR’s ‘market access,’ while justified, is now bordering on the absurd. Moody’s, in particular, has been warning the commonwealth to demonstrate market access by the end of January, or face a potential downgrade. Obviously, with only a week to go before month-end, the [Puerto Rico Gov. Alejandro García] Padilla team is not going to make that deadline. Will Moody’s use that excuse to justify a downgrade? We hope not.»
Also on Friday, S&P took actions on three Puerto Rico banks in the private sector. It shifted to a negative watch from a negative outlook on OFG Bancorp’s BB-plus issuer credit rating, B-plus FirstBank Puerto Rico issuer credit rating, and BBB-minus/A-3 Santander BanCorp issuer credit ratings.
While the government’s credit difficulties have little to do with the negative watch on FirstBank Puerto Rico, it is somewhat relevant to the watch on OFG Bancorp and is central to the watch on Santander BanCorp, said S&P analyst Sansierre Newsome.
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