Puerto Rico Bond Restructuring Remains Likely: BTIG

Puerto Rico Bond Restructuring Remains Likely: BTIG
<small><em>Photo</em> by <a href="http://pixabay.com/en/users/Kurious" target="_blank">Kurious</a> (<a href="http://pixabay.com" target="_blank">Pixabay</a>)</small>

The government of Puerto Rico held a webcast on Thursday, July 17th that provided a status report on its efforts to turn around PR’s economy while trying to deal with its huge debt burden. Mark Palmer of BTIG Research listened into the webcast and prepared a brief report summarizing it. Palmer noted that “the webcast gave us no reason to alter our view that a near-term PREPA restructuring is highly likely.”

Mortgage insurer exposure

A number of mortgage insurers are significantly exposed to Puerto Rico debt. The management of Assured Guaranty Ltd. (NYSE:AGO), MBIA Inc. (NYSE:MBI) and Ambac Financial Group, Inc. (NASDAQ:AMBC) were very likely listening closely to the webcast given the companies’ net respective insured exposure to Puerto Rico’s debt of $5.3 billion, $4.8 billion and $2.5 billion.

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Puerto Rico Electric Power Authority (PREPA) close to default

PR Governor Alejandro Garcia Padilla stated in the introduction of the webcast that the government had “given the public corporations the tools needed to achieve self-sufficiency.” Palmer says the balance of the presentation that these tools include the ability to use a debt cram-down under the Debt Enforcement Act’s Chapter 3. Analysts have previously noted that Chapter 3 of the new act essentially allows the Commonwealth’s new court to conduct a de-facto bankruptcy process.

The timeline for any potential moves is also becoming more clear, as the data presented in the slides during the webcast noted that PREPA has $696 million in revolving credit agreements that will be due during the next 30 days.

Plan to separate PREPA from other PR debt

Palmer also highlighted that the government officials hosting the webcast wanted to emphasize that their focus in applying the Debt Enforcement Act would be on PREPA, and not the Puerto Rico Highways & Transportation Authority (PRHTA) or the Puerto Rico Aqueduct & Sewer Authority (PRASA).

It was noted on the call that Governor Garcia Padilla had asked the PRHTA for a plan for reforming its operations “without using the Recovery Act,” and the comments about PRASA focused on the 60% average rate increase that has resulted in more than $360 million in additional revenues for FY 2014, which should be sufficient to meet the authority’s operating and financial obligations for the next three years.

Palmer also points out one of the webcast slides noted that “the Recovery Act will only be used as designed: as a last-resort, emergency measure.”

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