A report released by a group of hedge funds that own $5.2 billion of Puerto Rico bonds said the island’s central government can pay what it owes, showing the resistance the commonwealth faces as it seeks to restructure its $72 billion of debt.
Budget cuts and tax increases would allow Puerto Rico to stabilize its finances, according to a report by three former International Monetary Fund economists now at the Centennial Group, an advisory firm. It was commissioned by a group of more than three dozen funds, which includes Fir Tree Partners, Brigade Capital Management and Monarch Alternative Capital.
“The debt in the medium-term is sustainable,” Claudio Loser, one of the report’s authors, told reporters Sunday, when the study was released. “A global statement saying that the debt requires restructuring, we feel, is absolutely not substantiated.”
The hedge funds are among the first bondholders to challenge Puerto Rico’s claim last month that it needs to put off debt payments that have swelled from years of borrowing.
Governor Alejandro Garcia Padilla’s administration plans to draft a proposal by Sept. 1 for restructuring its debt, an unprecedented step in the U.S. municipal-bond market that’s likely to be challenged in court.
No Evidence
Loser, founding director of Centennial’s Latin America practice, said a restructuring isn’t needed for “general government debt” such as general-obligation bonds. He said such a step may be necessary for some of the island’s approximately 18 debt-issuing agencies, though he declined to say which ones.
“There is no evidence that one can gather that says there is a need for a general restructuring of debt,” he said. “There is no reason for anything like that.” Garcia Padilla’s chief of staff, Victor Suarez, said Puerto Rico has enacted significant fiscal measures, including tax increases, and is considering additional steps.
“However, the simple fact remains that extreme austerity placed on Puerto Ricans with less than a comprehensive effort from all stakeholders is not a viable solution for an economy already on its knees,” Suarez said in a statement Sunday.
Puerto Rico securities have tumbled amid speculation about how much investors stand to lose. Last week, Moody’s Investors Service said investors may receive as little as 35 cents on the dollar on some securities, while owners of debt with the greatest safeguards could receive more than twice as much.
Default Odds
Moody’s said it’s near certain that Puerto Rico will default on some of its securities. The first could come as soon as Aug. 1, when $36.3 million of bonds sold by its Public Finance Corp. become due, because the legislature hasn’t appropriated the funds.
The varying legal protections for Puerto Rico’s securities promises to pit owners of general-obligation bonds, which have a constitutional pledge of repayment, against holders of other securities such as sales-tax debt that are backed by dedicated revenue sources.
The hedge-fund group holds both types of securities. The report released Sunday challenges a key aspect of a rival analysis prepared for Puerto Rico by other former IMF officials, which said the debt relief is needed to steady the island’s finances.
Rival Analysis
The economists hired by the hedge fund group said fiscal reforms and additional short-term borrowing would be sufficient to shore up the commonwealth’s budget. Such measures, it said, could leave the central government with a surplus -- after making interest payments -- by the next fiscal year.
Puerto Rico could raise an extra $1.1 billion by boosting compliance with the sales tax to a level in line with the typical U.S. state, according to the report.
“Puerto Rico can avoid a costly default,” said Jose Fajgenbaum, one of the authors of the report. “There is a better way.” Puerto Rico’s debt crisis has resulted from years of borrowing to paper over budget shortfalls as its economy struggled to grow and residents left for the U.S. mainland.
The island’s population has declined by 7 percent in the past decade, with another 245,000 forecast to leave the island by 2025, according to the Puerto Rico’s Planning Board. Puerto Rico securities have been trading at distressed levels for two years on concern the island won’t repay its obligations on time and in full.
General obligations maturing July 2035 and originally sold in March 2014 at 93 cents on the dollar traded Monday for of 71 cents on the dollar, according to data compiled by Bloomberg. The average yield was 11.8 percent.
bloomberg.com
Budget cuts and tax increases would allow Puerto Rico to stabilize its finances, according to a report by three former International Monetary Fund economists now at the Centennial Group, an advisory firm. It was commissioned by a group of more than three dozen funds, which includes Fir Tree Partners, Brigade Capital Management and Monarch Alternative Capital.
“The debt in the medium-term is sustainable,” Claudio Loser, one of the report’s authors, told reporters Sunday, when the study was released. “A global statement saying that the debt requires restructuring, we feel, is absolutely not substantiated.”
The hedge funds are among the first bondholders to challenge Puerto Rico’s claim last month that it needs to put off debt payments that have swelled from years of borrowing.
Governor Alejandro Garcia Padilla’s administration plans to draft a proposal by Sept. 1 for restructuring its debt, an unprecedented step in the U.S. municipal-bond market that’s likely to be challenged in court.
No Evidence
Loser, founding director of Centennial’s Latin America practice, said a restructuring isn’t needed for “general government debt” such as general-obligation bonds. He said such a step may be necessary for some of the island’s approximately 18 debt-issuing agencies, though he declined to say which ones.
“There is no evidence that one can gather that says there is a need for a general restructuring of debt,” he said. “There is no reason for anything like that.” Garcia Padilla’s chief of staff, Victor Suarez, said Puerto Rico has enacted significant fiscal measures, including tax increases, and is considering additional steps.
“However, the simple fact remains that extreme austerity placed on Puerto Ricans with less than a comprehensive effort from all stakeholders is not a viable solution for an economy already on its knees,” Suarez said in a statement Sunday.
Puerto Rico securities have tumbled amid speculation about how much investors stand to lose. Last week, Moody’s Investors Service said investors may receive as little as 35 cents on the dollar on some securities, while owners of debt with the greatest safeguards could receive more than twice as much.
Default Odds
Moody’s said it’s near certain that Puerto Rico will default on some of its securities. The first could come as soon as Aug. 1, when $36.3 million of bonds sold by its Public Finance Corp. become due, because the legislature hasn’t appropriated the funds.
The varying legal protections for Puerto Rico’s securities promises to pit owners of general-obligation bonds, which have a constitutional pledge of repayment, against holders of other securities such as sales-tax debt that are backed by dedicated revenue sources.
The hedge-fund group holds both types of securities. The report released Sunday challenges a key aspect of a rival analysis prepared for Puerto Rico by other former IMF officials, which said the debt relief is needed to steady the island’s finances.
Rival Analysis
The economists hired by the hedge fund group said fiscal reforms and additional short-term borrowing would be sufficient to shore up the commonwealth’s budget. Such measures, it said, could leave the central government with a surplus -- after making interest payments -- by the next fiscal year.
Puerto Rico could raise an extra $1.1 billion by boosting compliance with the sales tax to a level in line with the typical U.S. state, according to the report.
“Puerto Rico can avoid a costly default,” said Jose Fajgenbaum, one of the authors of the report. “There is a better way.” Puerto Rico’s debt crisis has resulted from years of borrowing to paper over budget shortfalls as its economy struggled to grow and residents left for the U.S. mainland.
The island’s population has declined by 7 percent in the past decade, with another 245,000 forecast to leave the island by 2025, according to the Puerto Rico’s Planning Board. Puerto Rico securities have been trading at distressed levels for two years on concern the island won’t repay its obligations on time and in full.
General obligations maturing July 2035 and originally sold in March 2014 at 93 cents on the dollar traded Monday for of 71 cents on the dollar, according to data compiled by Bloomberg. The average yield was 11.8 percent.
bloomberg.com
No comments:
Post a Comment