Investors are bracing for Puerto Rico to miss about $58 million
in bond payments in coming days, as the U.S. commonwealth attempts
to restructure $72 billion of debt.
Saturday's deadline could mark the first skipped payment to
bondholders since Gov. Alejandro Garcia Padilla last month said
that the island's debts were unsustainable and urged negotiations
with creditors. Because Saturday is a weekend, payment can be made
Monday, a spokeswoman for Puerto Rico said.
Public Finance Corp., a financing unit for Puerto Rico's
government, this month notified holders of appropriation bonds,
typically those backed by funds set aside by the legislature, that
it hadn't transferred money to a trustee to pay the debt due at the
beginning of August. The corporation said the legislature never
actually appropriated the funds. The missed transfer led some
ratings firms to say the island was highly likely to default.
Some bonds from Public Finance Corp. maturing in 2031 touched a
record low below 12 cents on the dollar this week, according to the
Electronic Municipal Market Access website.
Investors have braced for a cascade of defaults since last
month, when Mr. Garcia Padilla called for talks with bondholders to
delay some payments.
Many investors are Puerto Rico residents who bought the debt
seeking stable, tax-free income and already have suffered losses as
the commonwealth's credit ratings fell to junk status and bond
prices plummeted. Residents who bought Puerto Rico municipal-bond
funds from UBS Group AG's Puerto Rico brokerage unit, such as Hall
of Fame boxer Felix Trinidad, have been hit hard by the declining
bond prices, and some are filing legal claims against the unit to
recoup losses. Damages claimed by investors have exceeded $1.1
billion, UBS said in a regulatory filing this week.
A nonpayment would be another setback for Puerto Rico's 3.5
million residents, who already have struggled with a decade of
economic stagnation and high unemployment, highlighting the breadth
of the commonwealth's financial woes as it attempts to preserve its
cash, avoid a government shutdown and pay its creditors.
"The real challenge with Puerto Rico is that most of the costs
in their restructuring are going to be borne by Puerto Ricans,
whether it's ratepayers, taxpayers, service recipients or
bondholders," said Matt Fabian, partner at Concord, Mass.-based
research firm Municipal Market Analytics. Mr. Fabian said if Puerto
Rico defaults, it would be the largest in the history of the $3.7
trillion market for debt sold by U.S. state and local
governments.
Puerto Rico's Government Development Bank recently said it would
attempt to exchange or buy back outstanding bonds at prices below
face value. Economists hired by hedge funds that hold some of
Puerto Rico's debt said this week that the island can solve its
debt problems largely by increasing tax collections and
implementing service cuts.
A substantial amount of bonds from Public Finance Corp. and the
development bank are held by Puerto Rico residents, particularly
island credit unions, according to Daniel Hanson, an analyst at
Washington-based investment firm Height Securities LLC. Puerto Rico
investors tend to be concentrated in some of the more risky bonds,
in part because they were sold with extra tax breaks for island
residents, he said.
"For a lot of Puerto Ricans, this is a main source of retirement
income," he said. About half of municipal-bond mutual funds in the
U.S. have some exposure to Puerto Rico's debt, according to
research firm Morningstar Inc.
The credit unions, known as cooperatives, which have about one
million members and almost $9 billion in assets, have diversified
their holdings, boosting cash reserves and insurance to mitigate
any losses in Puerto Rico debt, said Daniel Rodriguez Collazo,
executive president of Cooperatives Supervision and Insurance
Corp., which regulates and insures the credit unions. The
cooperatives have also assembled a team of lawyers, economists and
financial advisers to negotiate with the government.
Credit unions are owed about $40 million in August, and most of
their government debt matures in five years or greater, he said.
"Our cooperatives have the capital, the assets and the liquidity
for any unpaid bonds they've invested in," Mr. Rodriguez Collazo
said. "Operations of our financial institutions won't be
affected."
A group of Puerto Rico policy makers is working on a
restructuring plan and scheduled to present its findings at the end
of August. Creditors, including mutual funds, hedge funds and other
distressed-debt investors, have been splitting into committees
based on which bonds they own.
Puerto Rico has said its debt includes about $18.6 billion of
general obligation bonds and government-guaranteed debt, $15.2
billion of sales-tax-backed bonds, and $24.1 billion of bonds
issued by government agencies, like the Puerto Rico Electric Power
Authority, which is already negotiating a restructuring with
creditors. Many investors hold bonds across the different sectors,
each of which could recover different amounts in a
restructuring.
Under U.S. law, Puerto Rico, unlike cities such as Detroit,
can't seek protection under chapter 9 of the U.S. Bankruptcy Code.
All states are barred from filing for bankruptcy protection. Puerto
Rico is lobbying Congress for a law to allow some of its entities
to access chapter 9 protections. The island's leaders must
negotiate with creditors without that process.
"I think it's going to get incredibly messy," said Nick
Venditti, portfolio manager at Santa Fe, N.M.-based Thornburg
Investment Management, which oversees about $11 billion in
tax-exempt debt.
Mike Cherney contributed to this article.
Write to Aaron Kuriloff at AARON.KURILOFF@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires