Who owns Puerto Rico’s debt?

Who owns Puerto Rico’s debt?

Puerto Rico is being dubbed «America’s Greece.» The island has too much debt that it can’t pay.

While the island managed to avoid default by making its big July 1 bond payments, Puerto Rico still has over $70 billion in outstanding debt to go. Governor Alejandro García Padilla has said the country won’t be able to pay that all back, dubbing it a «death spiral.»

«To tell you the truth, Puerto Rico is a bigger problem for American investors than Greece,» Alan Valdes, director of floor trading at DME Securities told CNN. «Most American investors have little exposure to Greece at all.»
Related: Puerto Rico avoids default…for now
The fallout: So who gets hurt if Puerto Rico doesn’t pay up — or if it only pays back a fraction of what it owes? It could be you.
A lot of regular Americans hold these bonds.
«I am worried. Any Puerto Rican is worried,» Rey J. de Leon, a 42-year-old lawyer in Puerto Rico told CNNMoney. «We have a lot of people who are seniors and they depend on the returns from those bonds to live on a month-to-month basis.»
Over 20% of bond mutual funds own Puerto Rican bonds, according to data from Morningstar (the exact numbers are 377 funds out of 1,884 United States bond mutual funds).
The majority of the funds with exposure are municipal bond funds or high yield bond funds. Puerto Rico’s bonds have municipal status, meaning they are tax exempt. That’s why a lot of retirees buy them.
In total, bond mutual funds hold about $11.3 billion of the island’s debt. Another roughly $15 billion is held by hedge funds. The remainder of the debt is held largely by individuals — mostly Puerto Ricans and mainland Americans.
«This is not the time to sell. The time to sell was maybe two or three years ago,» says de Leon. He is still confident Puerto Rico will be able to find a solution.
Related: Governor: Puerto Rico near ‘death spiral’
Is your bond fund invested? Puerto Rico’s bonds have also been demoted to «junk» status. Many insurance firms and pensions can’t hold Puerto Rican debt anymore because it has junk status. High yield bond funds invest in debt that is of poorer quality because it usually carries a higher interest rate to compensate investors for the extra risk they are taking on.
Among the funds that hold Puerto Rican debt, some of the largest are run by OppenheimerFunds and Franklin Templeton. For example, the Franklin Double Tax-Free Income Fund (FPRIX) holds nearly half of its investments in Puerto Rican bonds. The fund is down 4.5% this year and has only a 1-star rating out of 5 by Morningstar.
Numerous Oppenheimer Rochester municipal funds hold 15% or more of the fund in Puerto Rican bonds, including the Oppenheimer Rochester MD Municipal Fund (ORMDX), which is down 5% this year and has a 3-star rating from Morningstar.
These funds are making it clear that they will pursue legal action if Puerto Rico doesn’t pay.
«We expect Puerto Rico to act within the tenets of the law, including the Commonwealth’s Constitution, and are ready to defend the previously agreed to terms in each and every bond indenture,» said a spokesman from OppenheimerFunds.
In a blog post Tuesday, Franklin Templeton’s co-heads of the municipal bond group wrote: «At the very least, in our assessment, Puerto Rico can expect creditors to seek legal affirmation and protection of contractual rights.»
Related: Puerto Rico wants to be able to declare bankruptcy
What’s next? On Monday night, Padilla boldly asked Congress to grant Puerto Rico the ability to declare bankruptcy. Under U.S. law, only cities like Detroit and municipalities can declare bankruptcy.
Puerto Rico is putting together a «working group» to come up with a solution to its debt dilemma by the end of August. The island’s economy has been stuck in recession for nearly a decade, which further hampers its ability to generate taxes and pay back creditors.
Governor Padilla likes to say that Puerto Rico should not have to choose between paying its police and teachers or paying its creditors. But a lot of retirees and «regular Joe’s» own Puerto Rico’s debt on the other end.
Related: Puerto Rico’s economy is causing population exodus

http://money.cnn.com/video/investing/2015/07/01/puerto-rico-economy-debt.cnnmoney/

Why Puerto Rico attracts billionaires despite economic woes

A cruise ship pulls into the port in San Juan, Puerto Rico.
Puerto Rico is in default, its economy is tanking and the government is rationing water.
But some billionaires love the island anyway.

Puerto Rico is trying to lure wealth from the mainland U.S. with generous tax exemptions or cuts on corporate taxes, personal income, capital gains and other sources of profit.
The approach is sort of working. About 250 people with a net worth of $1 million have moved to the island since the law was introduced in 2012. Billionaire John Paulson is leading the charge of Wall Street wealth bound for Puerto Rico.
However, one of Puerto Rico’s biggest problems is its shrinking tax base as thousands of Puerto Ricans leave for Florida or Texas in search of a better economy. Welcoming wealthy mainland Americans with tax breaks would appear to be at odds with one of the island’s dire needs: tax money.
Related: Hedge funds wants Puerto Rico to close schools
Still, some say the tax exemptions could make Puerto Rico the next Singapore — an extremely wealthy tax haven.
Peter Schiff moved his asset management firm from Newport Beach, Calif., to San Juan in 2013. Schiff has bought a house in the Ritz Carlton compound just outside San Juan and water is not a problem for him. He plans to move there once his son graduates from high school. Individuals must live in Puerto Rico for 183 days a year to qualify for tax breaks.
But his company is already enjoying financial benefits, paying a low corporate tax rate of 4%. In California, Schiff’s firm had to pay the U.S. corporate tax rate, which is about 35%. He says tax breaks like those encourage him to create more jobs, which Puerto Rico badly wants.
Related: Puerto Rico’s other crisis: it’s running out of water
«I’m saving a lot of money,» says Schiff, CEO of Euro Pacific Capital. «It’s the closest thing to renouncing your U.S. citizenship without actually doing it…You’re still an American, you’re just out from under the IRS.»
For Puerto Rico, the point of the tax breaks is to make the island a home for the rich and their businesses so they’ll spend their money there.
Puerto Rico needs cash fast. The island’s government has about $70 billion in outstanding debt. It defaulted on Monday after it failed to make a small payment on its debt owed mostly to ordinary Puerto Ricans, who own the bonds through local credit unions called «cooperativas.»
The Puerto Rican government will present a restructuring proposal to its creditors by the end of August.
For now, default isn’t deterring the mega-rich from Puerto Rico’s tax-free business environment.
«Let’s say you want to start a business. Just start it in Puerto Rico. Why would you start it anywhere else?» says Schiff.
Related: Who owns Puerto Rico’s debt?
CNNMoney (New York) August 5, 2015: 4:05 PM ET

Puerto Rico’s terrible economy is causing a population exodus

Puerto Rico is on the brink of default — and a massive population drain.
Its economy has been spiraling for years now, and Puerto Ricans of all social classes have had it. They are moving to the mainland United States in rising numbers in search of jobs.

«We’re in unprecedented territory because this is, in recent memory, the biggest out-migration that Puerto Rico has experienced,» says Mark Lopez, director of Hispanic research at Pew.
It’s gotten to the point where the migration is beginning to rival the record numbers of Puerto Ricans who arrived in New York in the 1950s — the «West Side Story» era.
Related: Puerto Rico’s economy matters in the 2016 election
A debt debacle: In total, the Puerto Rican government is $73 billion in debt, and there’s a solid chance it could default this summer. A big payment for its energy provider is looming in July.
The problem looks like this: Puerto Rico has similar debt to New York — a very large state economy — but it only has the population of Connecticut.
Every time someone leaves Puerto Rico, it only exacerbates the situation. It shrinks the island’s tax base, which the government needs to pay for itself and its debts. In recent years, the government just issued even more debt to pay off its current debt.
Puerto Rico’s problems result from years of government overspending, high energy costs and dependence on debt, says Ted Hampton, an analyst at Moody’s who covers Puerto Rican bonds.
«It’s a self-perpetuating, vicious circle,» says Hampton. Along with a shrinking population, «the economy of Puerto Rico at the same time has also greatly underperformed.»
Moody’s downgraded most of Puerto Rico’s debt even further into junk status in May.
Related: Everybody wants to go to Cuba, what does that mean for the rest of the Caribbean?
Puerto Ricans are leaving: That news wasn’t received well by many Puerto Ricans, especially college graduates. They’re getting their degree and leaving, says Maritza Stanchich, a professor at the University of Puerto Rico and a columnist.
«It’s a marked shift in the past 10 years,» says Stanchich.
chart puerto rico migration
One of Stanchich’s former students and his wife plan to leave for Austin, Texas, in July. He’s never lived outside Puerto Rico and had no plans to move up until a year ago. When Moody’s first downgraded Puerto Rico’s bonds to junk status last year, he made the decision to leave.
«I don’t think we’ve hit bottom yet and that scares me,» says the 25-year-old graduate, who requested anonymity because he hasn’t quit his job in Puerto Rico yet. «There comes a point where you say ‘I’ve had enough. I’m a good person, I’m a good citizen, I pay my taxes.'»
He isn’t alone. Consider this: between 1980 and 2000, the average annual migration of Puerto Ricans to the mainland United States was 12,000 people. From 2010 to 2013 — when the economy started tanking — that figure jumped to 48,000 people per year.
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Energy problems: More people might try to leave after July 1st.
That’s when the government-run electricity provider, PREPA, has to make a $400 million debt payment it almost certainly can’t pay. Moody’s has rated PREPA’s bonds in the lowest category possible.
PREPA has about $9 billion in total debt. By comparison, when Detroit went into bankruptcy, it shed $7 billion. By law, Puerto Rico isn’t allowed to declare Chapter 9 bankruptcy the way that Detroit did.
PREPA’s problems are an oil story. The company still imports and burns crude oil to power its electric plants. While others in the Caribbean have turned to natural gas and renewable energy, PREPA continues its «inefficient» energy spending, according to Moody’s analysts.
The looming default may foreshadow a difficult dilemma for the government. It must start making decision between what’s best for its people and what’s best for its creditors.
«Those two obligations are coming into conflict here,» says Hampton, the Moody’s analyst. «Puerto Rico’s economy has languished and its citizens have been leaving the island to come to the mainland.»
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