Five months after Puerto Rico officials talked publicly to market participants, they held an investor call on Thursday with over 2,000 people. The call was captured by Storify. Puerto Rico’s previous call in February rallied market enthusiasm for a $3.5 billion general obligation bond offering that was priced on March 8. The March deal, the largest speculative grade bond deal ever done in muniland, replenished the coffers of the fiscally debilitated island.
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.
Barron’s had a recent story, “Puerto Rico’s Debt Woes Could Spread,” that says, “As mid-year statements go out, muni-fund redemptions could force selling of other credits.” Barron’s author Randall Forsyth wrote:
Puerto Rico agencies showered with credit downgrades
Moody’s Analytics: PR’s risk is highest of all 84 sovereign entities we track
Puerto Rico House and Senate pass balanced 2015 $ 9.56 billion budget
Puerto Rico’s May Economic Activity Index declines 1.1 percent year over year
Treasury Melba Acosta Febo signals Puerto Rico’s intent to restructure
Prepa is in dire dire straits – language from PR’s financial filings
Crunch time: Waiting for Prepa to make its $204 interest payment due July 1
Puerto Rico finally publishes their fiscal year 2013 financials
Nuveen on Prepa default signalling more general defaults
Creole Bankruptcy and energy reform are pieces of the same puzzle
Northern Mariana Islands bankruptcy filing may be Puerto Rico template
Senate President signs legislation to pay interest on general obligation bonds
Prepa bonds hit hard
Bellweather Puerto Rico general obligation bonds weakening
The news flow from Puerto Rico has become a whirling inferno since the government passed legislation last week to allow some of the Commonwealth’s public corporations to default.
In a dazzling effort, Puerto Rico Governor Alejandro Garcia Padilla presented legislation to restructure the debt of several public corporations. Both the Puerto Rico Senate and House approved the measure and pushed it to conference where statutes require that it be reconciled by the end of the legislative session on June 30. Seldom have financial markets seen such an elegantly choreographed approach to haircutting sovereign debt.
Puerto Rico’s faltering electricity monopoly PREPA received another blow this week when Standard & Poor’s downgraded the public corporation’s $8.8 billion of revenue debt to BBB- (5.5) from BBB (6) and placed the rating on CreditWatch with negative implications. This leaves PREPA one small step from junk grade in the three major raters.
Puerto Rico’s plan for a balanced budget for fiscal year 2015 is ambitious. Economic conditions continue to worsen and the commonwealth had a massive tax revenue shortfall in April. Although bondholders were a promised a balanced budget, uncertain tax collections are threatening a smooth transition away from deficit financing. There appears to be a growing political struggle as Puerto Rico attempts to cut $1.5 billion in operating expenses from a $9.6 billion budget.
Puerto Rico’s April tax collections suffered a big collapse. The projections were missed by 27 percent, or $442 million. The data was released last Friday. The April shortfall, caused mostly by reduced corporate income taxes, imperils year-end budget figures. It also jeopardizes the recently proposed fiscal year 2015 budget that was proposed by Puerto Rico Governor Alejandro García Padilla.
Tax-exempt investors have their own special metabolism. They seem not to react to bad news until someone presents them with an old newspaper and commands them to sit down and read it. The facts seem to startle the coupon clippers—why did no one tell them?— whereupon the market goes to pieces. Certainly, such was the case with Puerto Rico last summer (Grant’s, April 5, 2013). The commonwealth didn’t rack up all that debt by itself; a sleepy and guileless bond market was its co-dependent.