MuniLand

Puerto Rico now faces a $495 million revenue shortfall for the year. Revenues have come in less than projected, and having pared government jobs under the former governor Luis Fortuño, Puerto Rico is now resorting to one-off financial maneuvers to fill the budget hole. Moody’s describes the moves in a May 15 report:

In our issuer comment of March 18, 2013, Puerto Rico Faces Large Mid-Year Budget Gap, we noted that full year revenues for fiscal 2013 were likely to be $910 million or 10.4 percent below initial estimates of $8.750 billion and 9.3 percent below fiscal 2012 revenues. Revised estimates showed the shortfall to be slightly larger at $965 million as of January 31, 2013. In response, the commonwealth has implemented a number of corrective measures, including modest expense reductions.

Puerto Rico’s revenues are likely to decline 9 percent from 2012, and it has no time to raise taxes to capture more. The commonwealth has resorted to refinancing debt and moving debt between entities. It brings to mind how shell games are played.

From the Moody’s report again:

The commonwealth also executed a number of deficit financing measures, as originally contemplated in the fiscal year 2013 budget. It executed a $333 million deficit financing via a bond anticipation note (BAN) with a private bank that it expects to take out with a future COFINA bond issue.

This is the mystery EMMA filing of April 30, 2013. The commonwealth borrowed money from a private bank and will replace it with an upcoming bond issue. It then intends to make $775 million of debt service payments with money from the PR Government Development Bank, (GDB) which will turn around and issue more debt:

Puerto Rico’s governor Alejandro Garcia Padilla presented his new budget for the Commonwealth on Thursday. Caribbean Business reported on the details:

Puerto Rico Gov. Alejandro García Padilla unveiled a $9.83 billion operating budget Thursday night during a state of the commonwealth address in which he pledged to reduce crime, create jobs, boost school attendance and expand the U.S. territory’s tourism sector.

The proposed spending package is $783 million more than the current budget, which will be covered by new revenue and $200 million in deficit financing, he said.

via Jorge Banilla. Press closed captions for an English translation.

My Twitter thread was abuzz today with tweets about the comments made by Puerto Rico Governor, Alejandro García Padilla about the credit rating agencies (all of whom give PR the lowest investment grade rating of BBB- or Baa3):

@cate_long @edwinpr51 He said that he won’t let PR default, however,he won’t let the rating agencies run the country. Get it right!

— Antonio L. Pereira(@pnf_phytrade) April 2, 2013

Pathetic to see Gov. @agarciapadilla lashing out at ratings agencies just as his workgroup is headed to NY for crucial meetings #Incompetent

After similar challenges fought in 42 other states, Muniland’s two weakest credits – Illinois and Puerto Rico – are fighting difficult battles over pension reform. The pension struggles will have enormous effects on their creditworthiness.

Puerto Rico’s pension fund, which is dangerously close to insolvency, figured prominently in credit rater Moody’s analysis when it downgraded the commonwealth last December to Baa3, its lowest investment grade rating:

- Economic growth prospects remain weak after six years of recession and could be further dampened by the commonwealth’s efforts to control spending and reform its retirement system, both of which are needed to stabilize the commonwealth’s financial results. The lack of significant economic growth drivers and the commonwealth’s declining population have also reduced prospects for a strong economic recovery.

#PuertoRico‘s projected structural deficit for FY ’13 is $2.15B, higher than what was originally informed to credit agencies, Moody’s, S&P.

— News is my Business™ (@biznewspr) March 14, 2013

Dark clouds are hanging over Puerto Rico. Its projected 2013 deficit follows a likely 2012 deficit and twelve preceding deficits stretching back to 2000. The economy has not been generating sufficient tax revenue to support the services that the government has been providing to citizens. The difference has been made up by borrowing in the bond market and loans from the Puerto Rico Government Development Bank.

Now the bond market gatekeepers, – credit ratings agencies – are waving the red flag. Yesterday Standard & Poor’s downgraded the Commonwealth of Puerto Rico to BBB- (one tiny step before junk status) and followed this downgrade with one of the island’s Government Development Bank to BBB-. This is ominous. The GDB is the heart of Puerto Rico’s borrowing system.

Reuters reports:

The U.S. Federal Aviation Administration signed off on Tuesday on a 40-year lease of Puerto Rico’s Luis Munoz Marin International Airport to Aerostar Airport Holdings LLC, making it the first large U.S. airport to be placed in private hands.

The deal for the Caribbean’s busiest airport, with nearly 9 million passengers a year, is a milestone in Puerto Rico’s privatization program and a bid to expand tourism to help an economy that has long been ailing.

The report is a faithful approximation of the news release, which was the result of work by former governor Luis Guillermo Fortuño. The airport privatization deal was opposed by the current governor, Alejandro Javier García Padilla and his party. When Padilla was elected, he did not support the privatization deal, but he said he would honor the contract that the former governor had signed.

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.

Puerto Rico is drowning in debt. It is now in the process of leasing its Luis Munoz Marin International Airport to a Mexican firm Aeropuertos del Sureste (Aerostar). The airport (LMM) is the largest in the Caribbean, and it could become an international gateway to Central and South American cities. The lease deal lasts 40 years. However, studying the financial terms of the deal, it is not clear that Puerto Rico will really benefit much financially from privatizing the airport.

ASUR, a Mexican airport operator with concessions to operate, maintain and develop several airports in the southeast of Mexico, is doing the deal in partnership with Highstar Capital, an American infrastructure investment firm.

Looking at the financial data, which is sparse and hard to find, the deal is unlikely to generate any substantial cash for Puerto Rico. From the FAA application (page 9):

Some odd employment data is coming out of Puerto Rico. Although the population of the island has increased (see chart above), labor participation and the number of people employed have declined steadily, as seen below.

Meanwhile the government reports that the unemployment rate keeps declining (see below). Is this because they are contracting the size of the labor pool, or are there really new jobs coming online?

A Spanish-language publication says that employment gains this year are coming from government hiring (Google Translation from Spanish):

If you own bonds issued by the Commonwealth of Puerto Rico or one of its public entities, you need to read the latest report from Alan Schankel of Janney Montgomery Scott. An old-line broker in Philadelphia, Schankel has published the best overview of Puerto Rico debt that I have seen. And the future for most of this debt does not look too bright as Puerto Rico’s economy is barely crawling along.

There is nothing shocking in Schankel’s broad overview:

With outstanding debt in the range of $60 billion, Puerto Rico is one of the more prolific issuers of tax exempt municipal bonds. The fact that interest on island debt is exempt from all state and local income taxes generates particularly strong investor demand for bonds of the Commonwealth’s various issuers.

About half of the debt is general obligation or otherwise tax backed, while most of the remainder is secured by revenues, including electricity sales, water and sewer utility charges and highway tolls, with all bonds to varying degrees dependent on the fortunes and stability of the island’s economy. Puerto Rico’s status as a territory adds unique considerations to credit evaluation.