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Puerto Rico Debt Crisis: Desperate Times Call For Desperate Measures

October 16, 2015 Blog

The sky is falling in Puerto Rico. For the first time, the Government Development Bank debt, purportedly “guaranteed” by the government, is in danger of default. It is likely the GDB’s $354 million debt payment due on December 1 will be missed — a first even for a shaky borrower like Puerto Rico. Officials have said the government could run out of cash in November unless it can get a short-term loan or renegotiate its debts.

And on Thursday, Puerto Rico’s $72 billion debt crisis took a startling new turn.

Restructuring Puerto Rico’s Debt

The Wall Street Journal reported that Puerto Rico and U.S. officials are discussing the issuance of a “superbond” administered by the U.S. Treasury Department that would help restructure Puerto Rico’s debt.

“Under the plan, the Treasury would administer an account holding at least some of the island’s tax collections,” according to the WSJ report. “Funds in the account would be used to pay holders of the superbond, which would be issued to existing Puerto Rico bondholders in exchange for outstanding debt at a negotiated ratio. Investors would receive less debt but would have higher expectations for getting repaid.”

“The proposal would mark an important change in Puerto Rico’s relationship with the U.S. government, which has resisted wading into the island’s debt morass,” according to the Journal. “A superbond would need to clear high political hurdles in Washington and Puerto Rico to become a reality.”

The hedge fund crowd, which bought Puerto Rico’s debt at a deep discount, would love the idea, according to the Journal report. “A superbond could be appealing to creditors. Hedge funds that own billions of dollars of Puerto Rico debt have been pushing the idea of a superbond for months, hoping it would prevent a default and boost the value of their investments.”

But Mom and Pop investors, who bought their bonds and bond funds at par, would view such a plan with great skepticism, according to the WSJ.

“Bondholders are unwilling to swap the debt they hold for new bonds backed only by tax revenues under Puerto Rico’s supervision because they fear the money could be diverted,” according to the report. “But they might be tempted to tender their bonds for less than face value in exchange for a bond involving the Treasury. A bond administered by the Treasury would give investors greater certainty that their stream of payments wouldn’t be siphoned off for other purposes or revoked by politicians in the future.”

Meanwhile Puerto Rican leaders descended on Florida this week to drum up political support for the island’s plight. “Puerto Rican political, faith and civic leaders will convene in Orlando for a national meeting this week to develop a political agenda to pressure the federal government into taking action to help solve the island’s fiscal crisis,” according to the Washington Post.

All the stops are going to be pulled out in the coming weeks as a default by Puerto Rico, along with the potential for a government shutdown, looms.

Desperate times call for desperate measures.

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