FT Headline on Puerto Rico Creditor Meeting Borders on Journalistic Malpractice by Mark Palmer of BTIG Research
UPDATE 15-Jan-14 4:53pm: The Government Development Bank of Puerto Rico Interim President Jose Pagan and Treasury Secretary Melba Acosta Febo just released the following statement in response to speculation on Puerto Rico’s credit:
“A recent news article commented on an upcoming meeting of Puerto Rico’s creditors and included speculation about the Commonwealth’s credit situation. We believe it is not unusual, as part of the normal investment process, for private investors to meet with advisors to discuss a range of issues, and we understand that meetings of this nature occur periodically. We did not call for, were not invited to and are not participating in this meeting. We made significant progress in implementing our fiscal and economic development plans in 2013, and are determined to continue that progress in 2014. As we have stated publicly in the past, Puerto Rico will take every step necessary to continue honoring its obligations.”
Let’s say a group of New York Mets season ticket holders got together to talk about the team’s prospects in 2014. And they invited along some baseball writers they know to provide some color on the team.
As a result, the Mets would be a step closer to winning the World Series, right?
Of course they wouldn’t. But the “logic” behind such thinking was similar to that used by the writer of the headline for a Financial Times article about Puerto Rico published this afternoon: “Puerto Rico a Step Closer to Default.”
The article states that “creditors to Puerto Rico are meeting in New York on Thursday with lawyers and debt restructuring specialists as the territory appears increasingly likely to default on its $70bn in public sector debt and an additional $40bn of unfunded pension liabilities, these specialists say.”
In our view, a meeting between Puerto Rico’s creditors with lawyers and debt restructuring specialists will have just as much impact on the likelihood that the Commonwealth will default as the Mets fans’ meeting with baseball writers would have on their prospects of winning the title: none.
(Moreover, we have learned that the meeting in question will not be a Dr. Evil-like gathering in which participants intend to plot to force Puerto Rico into a default. It is a conference in which a law firm with a restructuring practice will be meeting with potential clients in an attempt to drum up new business.)
Whether Puerto Rico defaults or not will be determined by the trajectory of its revenues and its ability to access the capital markets. Creditors can prepare for various outcomes, but their ability to influence those outcomes is limited.
With that said, the one way those positioned to benefit from a default could try to influence the outcome in Puerto Rico could be by stirring up fear that could undermine the Commonwealth’s ability to float bond issues with reasonable coupons, which it has stated it hopes to do this month or in February. Such an effort to throw a wrench into Puerto Rico’s plans could be seen as warranted as a response to positive stories such as the one that Bloomberg News ran yesterday: “Puerto Rico Bond Outpace Muni Rally After Revenue Beats Budget.”
“Puerto Rico debt has earned 2.3 percent this year, outperforming the 27 states tracked by Standard & Poor’s and the 1.3 percent gain for the broader market,” the article stated. “Preliminary revenue collections for the six months through December were $80 million above budgeted estimates, according to Treasury Secretary Melba Acosta.”
Shares in buy-rated bond insurers MBIA (MBI), Assured Guaranty (AGO) and Ambac Financial Group (AMBC) sold off after the Financial Times article was published and word of it started making the rounds. We believe the FT’s misleading headline has created a buying opportunity in all three stocks.