United States Colony of Puerto Rico Facing Financial Ruin
by Christie Smythe
5:01 AM EDT
May 6, 2015
Puerto Rico is trying to revive a law allowing its public agencies and utilities to restructure their mounting debt as Detroit and other U.S. cities have done.
Creditors won the first fight in the case by persuading a federal judge in San Juan to throw out bankruptcy protections similar to those alloted municipal entities in the 50 U.S. states.
Puerto Rico on Wednesday is asking the U.S. Court of Appeals in Boston to reverse that ruling as the commonwealth struggles with $73 billion in debt.
By blocking enforcement of the restructuring law, the lower court relegated Puerto Rico “to an anomalous legislative no man’s land,” lawyers for Governor Alejandro Garcia Padilla and Secretary of Justice Cesar R. Miranda Rodriguez said in a court filing. “If Congress had intended to leave utilities, and the people they serve, at the mercy of their creditors, it surely could and would have so indicated.”
Franklin Resources Inc. and OppenheimerFunds Inc. investment funds and BlueMountain Capital Management LLC won a ruling in February from the judge in San Juan that the local restructuring law was in “irreconcilable conflict” with federal statutes. The firms, which at one time held about $2 billion in bonds issued by the Puerto Rico Electric Power Authority, alleged that the new law might force them to accept unfavorable restructuring terms if the heavily indebted utility sought to use it.
Congressional Intent
The dispute springs from the island’s status as a U.S. territory dependent on federal lawmakers to grant it benefits provided states. Congress intended to exclude Puerto Rico from Chapter 9 bankruptcy protections, the investment funds argue.
Commonwealth officials “argue for a topsy-turvy world, where Congress’ expressed preemption of state-enacted municipal bankruptcy laws becomes an option for states to enact such laws,” lawyers for some of the investment funds said in court filings.
The island’s agencies may seek protection under those provisions “only if the legislative body that exercises ultimate control over them -- Congress -- determines to so authorize,” lawyers for the funds said.
After years of borrowing to balance budgets, Puerto Rico and its agencies have racked up $73 billion of debt, more than any U.S. state except California and New York. Because most of the debt is tax-exempt nationwide, it’s held by mutual funds and individual investors.
Creditor Negotiations
The island has struggled to grow since 2006 and is losing population, spurring speculation it will fail to repay the obligations. Puerto Rico’s power utility has been negotiating with creditors and may ask them to take a loss, which would be the biggest restructuring ever in the municipal-bond market.
The commonwealth’s debt has been trading at distressed levels since August 2013. Prices on Puerto Rico’s newest general obligations touched the weakest yet after the governor’s tax overhaul proposal was rejected by lawmakers.
Bonds maturing in July 2035 traded May 1 at an average price of 77.57 cents on the dollar, the lowest since they were issued in March 2014, according to data compiled by Bloomberg. The average yield on the tax-exempt securities was 10.74 percent.
The Puerto Rico Public Corporations Debt Enforcement and Recovery Act was passed under threat of “fiscal emergency” last year, the bondholders alleged. Investors called the law a “harsher copy” of federal bankruptcy provisions that allow financially distressed municipal entities to seek protection from creditors while negotiating changes to debt terms.
The island’s representative in Congress, Pedro Pierluisi, has been advocating for a bill to amend the bankruptcy code to include Puerto Rico. The measure, which was a subject of a House Judiciary Committee subcommittee hearing this year, is supported by most of the island’s creditors, Pierluisi said in a statement in February.
The case is Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico, 15-1218, U.S. Court of Appeals for the First Circuit (Boston).
Gundlach Sees Puerto Rico Like Mortgages in 2008 Crisis
by Mary ChildsKelly Bit
7:20 PM EDT
May 4, 2015
DoubleLine Capital’s Jeffrey Gundlach sees the same investment potential in the municipal debt of Puerto Rico as he did in mortgage markets in 2008 -- so he’s buying.
“Puerto Rico muni bonds have priced in a lot of problems,” Gundlach said at the Sohn Investment Conference in New York on Monday, calling the securities “risky.” Gundlach said he feels “similar to how I felt about credit in 2008,” when he bought mortgage bonds from Wells Fargo & Co. When those fell as low as 65 cents on the dollar during the financial crisis, Gundlach “thought they were cheap enough to start buying,” and they turned out to be a “fantastic investment.”
Gundlach, whose Los Angeles-based firm oversees about $73 billion, is bullish on, and has already bought, Puerto Rico municipal debt and pension obligation bonds. His comparison to mortgage-backed securities from the 2008 financial crisis recalls the investments that helped build his reputation, as Gundlach was early to spot trouble in the U.S. property market and predicted the subprime mortgage crisis in 2007.
DoubleLine, which Gundlach co-founded in 2009 with Phil Barach after losing an internal struggle for leadership at TCW Group, has already doubled its holdings of general-obligation debt from the commonwealth to $45 million in the Income Solutions Fund at the end of March. The $2.28 billion Income Solution fund’s investment was up from $20 million the prior month, and zero at year-end, according to data compiled by Bloomberg.
Distressed Levels
Puerto Rico bonds, most of which are tax-exempt nationwide, have traded at distressed levels for more than a year amid speculation the commonwealth and its agencies won’t be able to repay $73 billion of debt. Municipal bonds from Puerto Rico lost 2.6 percent this year through May 1, the worst annual start since at least 2007, according to Standard & Poor’s Dow Jones Indices.
Gundlach has company in betting on Puerto Rico. A group of 34 hedge funds with $4.5 billion of its debt has said the island has potential to turn around. Among its members is New York-based Stone Lion Capital Partners, said Russ Grote, a Washington-based spokesman for the group. Others include Brigade Capital Management, Centerbridge Capital Partners, Davidson Kempner Capital Management, Fir Tree Partners and Monarch Alternative Capital.
Investors can buy 8 percent notes maturing in 2035 at 79 cents on the dollar, “triple-tax free of about 11 percent” yield, and “the government is committed to repaying the debt in time,” Gundlach said.
“I’ve started to buy them,” he said. While so far it’s “only a partial position,” he said, “I think these bonds go lower, but I think you start buying them at 78.”
Gundlach cited Puerto Rico’s 6.2 percent pension obligation bonds due in 2039, which are trading at 37.6 cents on the dollar to yield about 17 percent, according to prices compiled by Bloomberg.
“They’re priced for default yet are paying monthly,” he said.
Puerto Rico Bankruptcy Bill Chances Fading, MMA Analyst Says
by Kasia Klimasinska
6:25 PM EDT
April 29, 2015
A bill that would let Puerto Rico’s agencies file for Chapter 9 bankruptcy stands scant chance in Congress, according to Robert Donahue, a research analyst at Municipal Market Analytics Inc.
Opposition to the measure sponsored by the commonwealth’s non-voting representative is strong among investors, Donahue said in a telephone interview Wednesday. Opponents, including Franklin Resources Inc. and OppenheimerFunds Inc., are far more vocal than supporters, he said.
“The opponents to extending the Chapter 9 have been extremely aggressive in lobbying members of Congress against it,” he said. “There is a small and growing lobby in favor of Chapter 9 authorization, but to date, the two mutual funds have outspent them.”
On the prospects of any bill to allow Puerto Rico to file for bankruptcy, Michael Steel, a spokesman for House Speaker John Boehner of Ohio, deferred comment to the Judiciary Committee and its chairman, Bob Goodlatte of Virginia.
There, a House Judiciary aide responded that the merits of such legislation are still being weighed, and that it was too early to comment on next steps.
Junk-rated Puerto Rico and its agencies have $73 billion of debt. The island’s economy has struggled to grow since 2006, casting doubt on the commonwealth’s ability to repay its obligations. The Electric Power Authority is negotiating with creditors to reduce its $8.6 billion of debt and get more time to repay loans.
No Authority
Puerto Rico’s non-voting representative in the U.S. Congress, Pedro Pierluisi, concluded that the Federal Reserve has no authority to purchase or guarantee bonds issued by Puerto Rico, Carmen Feliciano, his chief of staff, said in an e-mail Wednesday.
“Representative Pierluisi is focused on advancing his bill through the legislative process, since he believes this is the best way to help Puerto Rico on the federal level,” Feliciano said. “To date, we have seen no indication that Treasury intends to take any extraordinary measures to assist Puerto Rico.”
Dan Watson, a Treasury spokesman, said: “Federal policy experts are sharing their expertise with the Puerto Rican officials that are leading the Commonwealth’s economic policies, but these efforts should not be interpreted as any kind of federal intervention.”
Tax-Exempt Debt
Like U.S. states, Puerto Rico, a self-governing island of 3.5 million, can’t file for bankruptcy. Because most of the Commonwealth’s debt is tax-exempt nationwide, it’s held by mutual funds and individual investors.
Representative John Conyers of Michigan, the highest-ranking Democrat on the House Judiciary Committee, and Hank Johnson, a top Democrat on the subcommittee on regulatory reform, expressed support for the legislation during a Feb. 26 hearing.
Three of the four witnesses called before the Republican-dominated panel supported the bill.
“Use of Chapter 9 by any of Puerto Rico’s public corporations will cause more harm than good, for both millions of Americans who invested in Puerto Rico bonds and for the Commonwealth,” testified Thomas Moers Mayer, partner and co-chair of the corporate restructuring and bankruptcy group at Kramer Levin Naftalis & Frankel LLP in New York. Mayer represents Franklin Resources and OppenheimerFunds.
5:01 AM EDT
May 6, 2015
Puerto Rico is trying to revive a law allowing its public agencies and utilities to restructure their mounting debt as Detroit and other U.S. cities have done.
Creditors won the first fight in the case by persuading a federal judge in San Juan to throw out bankruptcy protections similar to those alloted municipal entities in the 50 U.S. states.
Puerto Rico on Wednesday is asking the U.S. Court of Appeals in Boston to reverse that ruling as the commonwealth struggles with $73 billion in debt.
By blocking enforcement of the restructuring law, the lower court relegated Puerto Rico “to an anomalous legislative no man’s land,” lawyers for Governor Alejandro Garcia Padilla and Secretary of Justice Cesar R. Miranda Rodriguez said in a court filing. “If Congress had intended to leave utilities, and the people they serve, at the mercy of their creditors, it surely could and would have so indicated.”
Franklin Resources Inc. and OppenheimerFunds Inc. investment funds and BlueMountain Capital Management LLC won a ruling in February from the judge in San Juan that the local restructuring law was in “irreconcilable conflict” with federal statutes. The firms, which at one time held about $2 billion in bonds issued by the Puerto Rico Electric Power Authority, alleged that the new law might force them to accept unfavorable restructuring terms if the heavily indebted utility sought to use it.
Congressional Intent
The dispute springs from the island’s status as a U.S. territory dependent on federal lawmakers to grant it benefits provided states. Congress intended to exclude Puerto Rico from Chapter 9 bankruptcy protections, the investment funds argue.
Commonwealth officials “argue for a topsy-turvy world, where Congress’ expressed preemption of state-enacted municipal bankruptcy laws becomes an option for states to enact such laws,” lawyers for some of the investment funds said in court filings.
The island’s agencies may seek protection under those provisions “only if the legislative body that exercises ultimate control over them -- Congress -- determines to so authorize,” lawyers for the funds said.
After years of borrowing to balance budgets, Puerto Rico and its agencies have racked up $73 billion of debt, more than any U.S. state except California and New York. Because most of the debt is tax-exempt nationwide, it’s held by mutual funds and individual investors.
Creditor Negotiations
The island has struggled to grow since 2006 and is losing population, spurring speculation it will fail to repay the obligations. Puerto Rico’s power utility has been negotiating with creditors and may ask them to take a loss, which would be the biggest restructuring ever in the municipal-bond market.
The commonwealth’s debt has been trading at distressed levels since August 2013. Prices on Puerto Rico’s newest general obligations touched the weakest yet after the governor’s tax overhaul proposal was rejected by lawmakers.
Bonds maturing in July 2035 traded May 1 at an average price of 77.57 cents on the dollar, the lowest since they were issued in March 2014, according to data compiled by Bloomberg. The average yield on the tax-exempt securities was 10.74 percent.
The Puerto Rico Public Corporations Debt Enforcement and Recovery Act was passed under threat of “fiscal emergency” last year, the bondholders alleged. Investors called the law a “harsher copy” of federal bankruptcy provisions that allow financially distressed municipal entities to seek protection from creditors while negotiating changes to debt terms.
The island’s representative in Congress, Pedro Pierluisi, has been advocating for a bill to amend the bankruptcy code to include Puerto Rico. The measure, which was a subject of a House Judiciary Committee subcommittee hearing this year, is supported by most of the island’s creditors, Pierluisi said in a statement in February.
The case is Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico, 15-1218, U.S. Court of Appeals for the First Circuit (Boston).
Gundlach Sees Puerto Rico Like Mortgages in 2008 Crisis
by Mary ChildsKelly Bit
7:20 PM EDT
May 4, 2015
DoubleLine Capital’s Jeffrey Gundlach sees the same investment potential in the municipal debt of Puerto Rico as he did in mortgage markets in 2008 -- so he’s buying.
“Puerto Rico muni bonds have priced in a lot of problems,” Gundlach said at the Sohn Investment Conference in New York on Monday, calling the securities “risky.” Gundlach said he feels “similar to how I felt about credit in 2008,” when he bought mortgage bonds from Wells Fargo & Co. When those fell as low as 65 cents on the dollar during the financial crisis, Gundlach “thought they were cheap enough to start buying,” and they turned out to be a “fantastic investment.”
Gundlach, whose Los Angeles-based firm oversees about $73 billion, is bullish on, and has already bought, Puerto Rico municipal debt and pension obligation bonds. His comparison to mortgage-backed securities from the 2008 financial crisis recalls the investments that helped build his reputation, as Gundlach was early to spot trouble in the U.S. property market and predicted the subprime mortgage crisis in 2007.
DoubleLine, which Gundlach co-founded in 2009 with Phil Barach after losing an internal struggle for leadership at TCW Group, has already doubled its holdings of general-obligation debt from the commonwealth to $45 million in the Income Solutions Fund at the end of March. The $2.28 billion Income Solution fund’s investment was up from $20 million the prior month, and zero at year-end, according to data compiled by Bloomberg.
Distressed Levels
Puerto Rico bonds, most of which are tax-exempt nationwide, have traded at distressed levels for more than a year amid speculation the commonwealth and its agencies won’t be able to repay $73 billion of debt. Municipal bonds from Puerto Rico lost 2.6 percent this year through May 1, the worst annual start since at least 2007, according to Standard & Poor’s Dow Jones Indices.
Gundlach has company in betting on Puerto Rico. A group of 34 hedge funds with $4.5 billion of its debt has said the island has potential to turn around. Among its members is New York-based Stone Lion Capital Partners, said Russ Grote, a Washington-based spokesman for the group. Others include Brigade Capital Management, Centerbridge Capital Partners, Davidson Kempner Capital Management, Fir Tree Partners and Monarch Alternative Capital.
Investors can buy 8 percent notes maturing in 2035 at 79 cents on the dollar, “triple-tax free of about 11 percent” yield, and “the government is committed to repaying the debt in time,” Gundlach said.
“I’ve started to buy them,” he said. While so far it’s “only a partial position,” he said, “I think these bonds go lower, but I think you start buying them at 78.”
Gundlach cited Puerto Rico’s 6.2 percent pension obligation bonds due in 2039, which are trading at 37.6 cents on the dollar to yield about 17 percent, according to prices compiled by Bloomberg.
“They’re priced for default yet are paying monthly,” he said.
Puerto Rico Bankruptcy Bill Chances Fading, MMA Analyst Says
by Kasia Klimasinska
6:25 PM EDT
April 29, 2015
A bill that would let Puerto Rico’s agencies file for Chapter 9 bankruptcy stands scant chance in Congress, according to Robert Donahue, a research analyst at Municipal Market Analytics Inc.
Opposition to the measure sponsored by the commonwealth’s non-voting representative is strong among investors, Donahue said in a telephone interview Wednesday. Opponents, including Franklin Resources Inc. and OppenheimerFunds Inc., are far more vocal than supporters, he said.
“The opponents to extending the Chapter 9 have been extremely aggressive in lobbying members of Congress against it,” he said. “There is a small and growing lobby in favor of Chapter 9 authorization, but to date, the two mutual funds have outspent them.”
On the prospects of any bill to allow Puerto Rico to file for bankruptcy, Michael Steel, a spokesman for House Speaker John Boehner of Ohio, deferred comment to the Judiciary Committee and its chairman, Bob Goodlatte of Virginia.
There, a House Judiciary aide responded that the merits of such legislation are still being weighed, and that it was too early to comment on next steps.
Junk-rated Puerto Rico and its agencies have $73 billion of debt. The island’s economy has struggled to grow since 2006, casting doubt on the commonwealth’s ability to repay its obligations. The Electric Power Authority is negotiating with creditors to reduce its $8.6 billion of debt and get more time to repay loans.
No Authority
Puerto Rico’s non-voting representative in the U.S. Congress, Pedro Pierluisi, concluded that the Federal Reserve has no authority to purchase or guarantee bonds issued by Puerto Rico, Carmen Feliciano, his chief of staff, said in an e-mail Wednesday.
“Representative Pierluisi is focused on advancing his bill through the legislative process, since he believes this is the best way to help Puerto Rico on the federal level,” Feliciano said. “To date, we have seen no indication that Treasury intends to take any extraordinary measures to assist Puerto Rico.”
Dan Watson, a Treasury spokesman, said: “Federal policy experts are sharing their expertise with the Puerto Rican officials that are leading the Commonwealth’s economic policies, but these efforts should not be interpreted as any kind of federal intervention.”
Tax-Exempt Debt
Like U.S. states, Puerto Rico, a self-governing island of 3.5 million, can’t file for bankruptcy. Because most of the Commonwealth’s debt is tax-exempt nationwide, it’s held by mutual funds and individual investors.
Representative John Conyers of Michigan, the highest-ranking Democrat on the House Judiciary Committee, and Hank Johnson, a top Democrat on the subcommittee on regulatory reform, expressed support for the legislation during a Feb. 26 hearing.
Three of the four witnesses called before the Republican-dominated panel supported the bill.
“Use of Chapter 9 by any of Puerto Rico’s public corporations will cause more harm than good, for both millions of Americans who invested in Puerto Rico bonds and for the Commonwealth,” testified Thomas Moers Mayer, partner and co-chair of the corporate restructuring and bankruptcy group at Kramer Levin Naftalis & Frankel LLP in New York. Mayer represents Franklin Resources and OppenheimerFunds.
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