Puerto Rico has apparently pulled off a minor financial miracle. The island commonwealth was widely expected to default or restructure a number of bonds due yesterday, but the government managed to scrape up enough to pay the payments in full.
Multiple sources have confirmed that Puerto Rico paid all of its $1.9 billion in bond debts due on Wednesday. By making the payments, the island has given itself some breathing room to deal with its financial crisis. Governor Alejandro Garcia Padilla recently called Puerto Rico’s close to $73 billion debt “not payable,” warning bondholders to expect to at least extend payment schedules.
Bond insurer confirms Puerto Rico payment
The National Public Finance Guarantee Corporation (a subsidiary of major bond insurer MBIA) confirmed late on Wednesday that utility firm PREPA and all other Puerto Rico-related institutions had made their full debt-service payments. “As a result, there were no claims on any of National’s insurance policies,” the firm noted in a statement.
In addition, National and other forbearing bond insurers announced they will provide $128 million in short-term bridge financing to “strengthen Prepa’s liquidity position while these vital negotiations continue.”
The statement continued to note: “By honoring its legal obligations to bondholders, Prepa can return its full attention to addressing its operational and financial challenges.”
The insurer also highlighted that its Puerto Rico exposure had in consequence decreased by close to $250 million.
Earlier comments by Puerto Rico Governor Garcia Padilla
In comments made to the media on Monday, Puerto Rico Governor Garcia Padilla called for restructuring of bonds and reforms, noting that the island plans to reach a moratorium with bondholders and hold off on making some debt payments for years.
Debt experts and financial analysts have been pointing out for some time that Puerto Rico’s economic situation is becoming critical, and Garcia Padilla has also issued warnings on several occasions that the government is simply not producing sufficient income to meet its obligations.
Of note, the government has been cutting costs as the crisis worsens, but Garcia Padilla has said he would not consider cutting the minimum wage, although virtually all other cost-cutting measures are on the table.
Rafael Costas and Sheila Amoroso of Franklin Templeton Investments argue that the restructuring is likely to be a long and costly legal battle for Puerto Rico, but the muni market is healthy enough overall that this situation will not have a major impact.
Marathon’s Bruce Richards positive on PREPA bonds
Co-founder and CEO of Marathon Asset Management Bruce Richards is bullish on Puerto Rico debt. Richards normally only takes positions in the range of 1-2%, but if he is really positive about a situation, a position can can expand to as much as 5%. Richards recently commented that he really likes bonds in Puerto Rico because of their attractive value proposition in today’s low-yield environment.
He starts by pointing out that PR bonds have long been enticing because of their triple tax-exempt status. Unlike most other muni bonds, Puerto Rico muni bonds are automatically exempt from federal, state and local taxes no matter where the investor lives (most muni bonds are only exempt from federal tax). He highlights that the Puerto Rican utility PREPA’s bonds are particularly attractive given the high likelihood of a $2 billion cash infusion from private lenders in the near future.
