Estimating muniland bond recoveries

July 17, 2014

A lot of people in muniland have asked me how much the bonds of Puerto Rico’s electric monopoly Prepa will recover if they are restructured. I’ve thrown out a few numbers, but I don’t have an analytical tool to do a proper cash flow analysis. Chris Foster, managing director of New Oak, has published an open source model (download middle right of page – XLSM file) that allows one to adjust various inputs like fuel prices and electric rates to estimate the level of debt service that Prepa can support.

Puerto Rico

New Oak put most of Prepa’s historical financial data into the spreadsheet and creates scenarios that can be adjusted to estimate how much bondholders will have to be cut.

Foster explained that his firm, a subadvisor to funds and financial institutions, was hearing a lot of uninformed theories about Prepa. He thought modeling the potential outcomes would be helpful. His firm and their clients do not own Prepa bonds. Foster said that it was time for everyone involved “to look at the math.”

Foster says statements like Puerto Rico Governor Alejandro García Padilla’s that he wanted to sue raters were made to give local residents a target for their anger, but bondholders should ignore the rhetoric. He welcomes feedback from market participants about his open source model. Foster also told me that municipal analysts should start doing more fundamental credit analysis like distressed debt analysts.

I talked to Shawn O’Leary, Nuveen Asset Management senior vice president, about Foster’s model. He believes the concept is a great idea, but O’Leary doesn’t think that a Prepa restructuring would be about cash flows. Instead, it would be about protecting the liquidity of the Government Development Bank (GDB), which has been operating as the government cash slush for years.

The Puerto Rico government’s communications have been opaque. It did not hold its annual bondholder conference this year (instead the government held a conference headlined by John Paulson advocating tax breaks for rich U.S. investors to move to the island). O’Leary told me that his calls have not been returned as much by the GDB since the government hired the restructuring firm Cleary Gottlieb.

The government’s investor call on Thursday is the last gasp of the government trying to woo back investors who sold their bonds after the public corporation restructuring law was passed.

According to O’Leary, there is only a limited chance that Prepa will not file for reorganization. Perhaps Cleary Gottlieb partner Lee Buchheit preferred that Prepa’s bonds be sold off so they would fall in the hands of hedge funds and others at a very low price (many of Prepa’s bonds touched a low of 40 cents on the dollar). If hedge funds and others owned Prepa bonds at 40 cents, they would be willing to take a lower recovery value during restructuring talks.

Municipal news service Debtwire is reporting that a group of hedge funds has “begun to coalesce around their own legal experts and have hired Morrison & Foerster.” Let the legal games begin.

Meanwhile, Puerto Rico mortgage originations plunged 34 percent in the first quarter of 2014.


Nuveen: Puerto Rico — An Island Unto Itself Pierluisi met with Moody’s and Fitch in New York (Spanish)

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