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January 15, 2014 5:33 pm
Investors in Puerto Rico‘s debt, including hedge funds, are meeting in New York on Thursday with restructuring specialists as a moratorium on payments on the territory’s $70bn in public sector debt and an additional $40bn of unfunded pension liabilities appears increasingly likely, these specialists say.
Puerto Rico’s government said on Wednesday it had not been invited to participate in the unofficial meeting, to be held at the offices of Jones Day, the law firm, adding that it would “take every step necessary to continue honouring its obligations”.
“We [have] made significant progress in implementing our fiscal and economic development plans in 2013, and are determined to continue that progress in 2014,” it said.
Any possible moratorium on debt payments would come despite the progress Puerto Rico’s governor Alejandro Garcia Padilla has made in raising taxes and reducing the territory’s deficit.
Puerto Rico’s status as an unincorporated territory makes a Chapter 9 filing for bankruptcy protection for local governments, such as the Detroit municipal filing last July, impossible. That situation complicates any negotiations with creditors.
The territory’s debt service burden requires it to pay between $3.4bn and $3.8bn each year for the next four years. As doubts grow about the ability of the commonwealth to service that debt, the cost of doing so will inevitably rise.
“The numbers are untenable,” said one restructuring adviser. “To issue new debt the yield would have to rise and where they can’t raise new money they will have to stop paying.”
If Puerto Rico was forced to take that step, the effects would probably ripple through the entire $4tn municipal bond market.
However, because Puerto Rico’s bonds are “triple tax free”, demand for them is high.
Even so, yields of Puerto Rico’s bonds have risen – and prices have fallen – indicating investors are nervous about prospects for debt repayment.
Estimates on how much of that debt is insured range from 25 per cent to 50 per cent of total issuance.
“Everyone thinks they can get out in time,” the restructuring adviser said.
Puerto Rico is likely to struggle to lift taxes much more. According to a document due to be presented at Thursday’s meeting, Puerto Rico’s debt per capita is more than $14,000, while income per capita is almost $17,000, a ratio of 83 per cent. California, Illinois and New York each have a debt to personal income ratio of 6 per cent, according to the document.
Puerto Rico’s unemployment rate of 14 per cent is more than twice the national average.
Congress could step in and create an insolvency regime, lawyers say, since it has comprehensive jurisdiction, but such a move would probably lead to partisan fighting.
This article has been amended to clarify the nature of Thursday’s meeting and incorporate comments by the Government of Puerto Rico.
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