Puerto Rico To Release First Balanced Budget In Two Decades

Puerto Rico PREPAPhoto by Kurious (Pixabay)

Puerto Rico Governor Alejandro Garcia Padilla is expected to release the commonwealth’s first balanced budget in two decades in conjunction with his State of the Commonwealth speech today, along with a four-year plan to rebuild Puerto Rico’s economy. There has been a lot of speculation about what Puerto Rico might be able to accomplish in the next few years, some of it very positive, but having a balanced budget for FY 2015 was already expected and has been priced into Puerto Rico bonds. The big news for bond investors is that Padilla has no intentions to restructure Puerto Rico’s public debt.

“We are not, at this point, contemplating any type of restructuring in the public corporations or in the central government,” said Padilla’s chief of staff Ingrid Vila Biaggi.

PREPA concerns weighing down bond insurer equities

“We have received numerous questions from investors during the past few weeks about weakness in the bond insurers’ equities, particularly when each of them has generated headlines that should have been supportive of higher valuations,” writes BTIG analyst Mark Palmer. “This weakness was due in large part to concerns that Puerto Rico Electric Power Authority (PREPA) would undertake a debt restructuring.”

Palmer explains that Standard & Poor’s placed PREPA’s BBB rating on negative outlook this January due to the threat of rising oil prices and the need for large capital expenditures to convert power plants to use natural gas instead. S&P didn’t argue that PREPA was in any immediate danger, but it questioned whether the utility company could find enough money to both service its $8.6 billion in bond debt and make necessary investments.

When Puerto Rico reportedly brought in a number of restructuring advisors, this was seen as confirmation that PREPA would look to restructure its debt. Officials say the advisors were brought in to consult on other issues, but they might also have been exploring their options and then decided not to pursue restructuring PREPA’s debt.

Bond insurers get a small bump

The combination of the balanced budget and taking debt restructuring off the table is good news for anyone exposed to Puerto Rico bonds, and bond insurer MBIA Inc. (NYSE:MBI), which Palmer rates a Buy, rose 2.12% after falling for most of the last month while Ambac Financial Group, Inc. (NASDAQ:AMBC), which Palmer rates as Neutral, rose 2.25%.

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About the Author

Michael Ide
Michael has a Bachelor's Degree in mathematics and physics from Boston University and Master's Degree in physics from University of California, San Diego. He has worked as an editor and writer for several magazines. Prior to his career in journalism, Michael Worked in the Peace Corps teaching math and science in South Africa.

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