Puerto Rico unveils a plan
Puerto Rico’s top public officials held a two-hour conference call on Tuesday that was open to all investors. That may have been a first for the Commonwealth. Previous calls and conferences had been relatively restrictive in who was admitted. The yields on Puerto Rico’s debt have skyrocketed and the Commonwealth’s access into the public debt markets has been basically shut down. The open conference call was a good change of approach.
Bond investors want to hear the facts about Puerto Rico’s fiscal condition and how they will be repaid on their investments. The call made some progress toward that goal.
The economic and fiscal situation in Puerto Rico is still extremely dire. The economy is mired in a six-year malaise that would be worse if the Puerto Rico government had not issued debt to cover government deficits. As the island has moved away from issuing debt to plug holes in the budget, it has simultaneously reduced the amount of fiscal stimulus that has been injected into the economy. The economy shrank 5.4 percent year over year in August. It will likely shrink more as the Commonwealth reduces its deficit financing.
The government has aggressively raised taxes and fees on fuel and electric services. Like, Greece, the government has reduced its workforce, further contracting the economy. Puerto Rico saw increased revenues from corporate taxes in the first quarter of fiscal year 2014, but individual income tax collection was down. Multinational corporations will be allowed to offset those taxes with reduced U.S. federal taxes; a form of backdoor bailout from Washington.
Dick Larkin of H.J. Sims circulated a note after the call:
The best new information provided was positive:
1. Clarification that liquidity does not pose a problem through at least fy 2014, so that market access and cash flow problems are being held at bay until the current muni market hysteria calms down
2. Commitment to better quarterly and monthly disclosure on P.R. and GDB Financial operations
3. Detail on the existence of an economic development strategy (although results to date are modest and future results are still uncertain)
There were hard hitting questions too:
Jon Pruchansky from Arrowgrass Capital Partners LP: The rating agencies have pointed to “demonstration of continued capital market access” as one of the factors supporting the GO rating. If yields have reached levels where issuance is too expensive, how do you address the perception that capital market access is gone?
GDB Chairman David Chafey: We will go to the markets when appropriate. We feel it’s a very manageable situation right now. [He implied very good private market access.]
Jon Pruchansky from Arrowgrass Capital Partners (US) LP: Are public corporations (i.e., PREPA, PRASA, PRHTA, not including COFINA) capable of filing Chapter 7 or 11 to restructure? The market is speculating that, because PREPA operates mostly as an autonomous entity, it could be restructured via a Chapter 11 bankruptcy to allow a less levered PREPA the capacity to issue new debt for the conversions to natural gas and investments in renewable energy. To be clear, confirmation that no debt restructuring is anticipated.
From the Bond Buyer: Puerto Rico officials sought to quell bankruptcy concerns over the commonwealth’s issuers, calling such an outcome ‘completely out of the question’ on an investor call Tuesday afternoon.
The government’s economic growth initiatives that were presented on the call were speculative and required long execution times, since most would require attracting additional production capacity from multinational corporations. The government also expressed confidence in its ability to reform the teachers’ pension system, which is in much better shape than the general employee retirement system that had been reformed earlier in the year.
Puerto Rico’s government leaders came across as confident and efficient. But they are rowing in treacherous waters. Their success relies on good conditions. Stay tuned for continued updates.