Puerto Rico’s pain stretches to its lack of assets
Juan Carlos Batlle, President of the Government Development Bank for Puerto Rico, does not like the way I characterized his comments at the Bloomberg State & Municipal Finance Conference last week. Here is the transcript of the panel he appeared on, so you can read his comments for yourself.
My criticism of Mr. Batlle was that the citizens of Puerto Rico were getting very little benefit from the government’s auction of a 40 year concession to the Luis Munoz Marin International Airport (LMM). But as I delved further, the situation became much more troubling than I had thought. It appears that Mr. Batlle and Puerto Rico are desperate to raise funds to pay down their massive debt load. Here is what Batlle said at the Bloomberg conference about leasing the LMM (from the transcript):
BATTLE [sic]: So we – for that we need to – I mean, we have I guess many people here know Puerto Rico’s situation in terms of her high debt load. So we have to tackle the issue and we have to start lowering our debt load.
[Former Washington, D.C. Mayor Anthony Williams]: Right.
BATTLE: So we’re using most of the money, and we did it the same with the toll road -
BATTLE: – we use most of the money to pay down debt.
The Puerto Rico Port Authority, which includes LMM airport, raised $669 million in bonds on December 16, 2011, and warned investors that the LMM lease arrangement must be completed. The Official Statement (page 5) warned investors that unless the deal to lease LMM were complete, then the Government Development Bank (GDB) would have to make principal and interest payments on the LMM bonds under GDB’s Letter of Credit.
Risk disclosures in these statements tend to be full of hyperbole, but a look at the balance sheet of the GDB is not reassuring. Intergovernmental lending by the GDB has increased rapidly in recent years. The bulk of GDB assets are loans to Puerto Rico municipalities and intergovernmental entities. These loans stood at $7.211 billion as of June 30, 2011, having increased from $5.675 billion in 2009 (page 9) (a list of GDB loans not including PR municipalities are on page 15). The GDB has rapidly increased its borrowing from the bond markets as public deposits at the bank have decreased (see chart above).
The GDB balance sheet is only as strong as the ability of the government units to repay their loans to the GDB. With Puerto Rico’s economy so weak, this would require very close monitoring.
Mr. Batlle seemed to struggle with the basic terms of the LMM deal at the Bloomberg conference. He described the upfront payment for LMM airport deal as $650 million, when it has been widely documented as being $615 million. But he is sticking to his story that the funds will be used to pay down debt.
BATLLE: OK. I – I will have to get back to you on the EBITDA number because I really don’t have it by heart.
But I – I – I can expand on the second question. We – right now the way that the – the structure is set we’re getting a – an upfront payment of $650 million. That’s on a – a payment at closing.
That – from that amount, $400 million have to be used to extinguish every debt related to the airport, not to the port authority. So that’s around $385 million in – in debt related to the airport.
So we’ll take that out and we expect to extinguish including about $505 million in debt out of $925 million that we have on the port authority. So … about 45 percent of that will be extinguished. We’ll have to restructure the remaining debt in a way that the port authority can – can sustain it, itself.
And that’s one of the main reasons why we did this restructure because the way it was set up right now our port authority, it just couldn’t – couldn’t handle the – the – the (inaudible) and we’ve been having to support it over time.
I still believe that the LMM deal is terrible for the citizens of Puerto Rico, and it gives way too much benefit to the investor group. But my bigger concern is that Puerto Rico’s debt is enormous, and it doesn’t have many assets left to monetize.