Puerto Rico's Latest Bond Plan Stirs Default Debate

Puerto Rico's planned bond sale from the Puerto Rico Infrastructure Finance Authority may lead to or prevent a default, depending on which analyst you believe.

The plan comes less than four months after the commonwealth's government spurred concerns over the risk of defaults on Puerto Rican bonds with passage of the Debt Enforcement and Recovery Act, which allows the island's public corporations to restructure their debt.

Under a bill that may be introduced by the legislature as soon as this week, PRIFA, which isn't subject to the recovery act, would be authorized to issue more than $1 billion of bonds. This would refinance debt owed to the Government Development Bank by the Puerto Rico Highways and Transportation Authority, which is subject to the new law.

The bond "looks like it could prevent a bond default by an agency [PRHTA] covered by the Debt Enforcement and Recovery Act," said Richard Larkin, senior credit analyst at Herbert J. Sims & Co.

Other analysts argued that the plan may weaken the highway authority's finances.

"We believe the proposed PRIFA deal is designed to bail out the Government Development Bank for Puerto Rico and the short-term note holders at the expense of current Puerto Rico Highways and Transportation Authority bondholders," said Triet Nguyen, managing director of NewOak. Revenues that had previously been meant to shore up highway authority would be transferred to PRIFA to service the new debt. For the PRHTA, "we are concerned this may be a first step toward an eventual Chapter 2 or 3 filing," Nguyen said.

Larkin said he was unsure of Puerto Rico agencies' abilities to continue to sell debt. So far Puerto Rico has succeeded in selling bonds by paying usurious rates, he said.

REOF Capital principal Antonio J. Fern-s-Sagebien had a mixed view of the proposed bond. "It seems like a good idea for PRIFA to buy PRHTA debt in order for the PRHTA to finally stand by itself and be able to continue improving Puerto Rico's infrastructure," he said.

However, he raised concerns over whether the new debt would hold the same or better ranking relative to its status with PRHTA, whether the infrastructure authority would have the same ability to service the debt or maintain the excise taxes serving as source of payment, and whether the bond would need bondholder approval.

Fern-s-Sagebien called for an end to opaqueness on transaction costs of issuances. GDB "must take advantage of the situation and submit the PRHTA to a major restructuring ensuring the expenditure structure must never again exceed its current fixed sources of income," he said, adding that the practice of matching fixed costs with short term variable income must end.

The PRHTA's board of directors should be overhauled to replace politicians with "real experts," he said. And the PRHTA should sell some idle plants, property or land.

In a liquidity report released Friday, the GDB said its projections assume that PRIFA will sell a bond to refinance PRHTA debt. The bond would refinance $1 billion of loans by the GDB to the PRHTA and $292 million of bond anticipation notes that the PRHTA owes the GDB.

In the liquidity report, the GDB said the bond will be sold sometime before the end of this calendar year.

Sen. Nadal Power said the size of the PRIFA bond García Padilla will propose remains to be seen. Reuters has reported it may be as large as $2.4 billion.

The GDB liquidity report indicated that the GDB had lower than projected liquidity levels on Sept. 30, but also indicated it projects higher levels than it had projected in its March 5 liquidity report. While on March 5 it had projected a total liquidity of $2.28 billion on Sept. 30, it actually had $1.40 billion.

On March 5 it had projected total liquidity levels of $1.87 billion on Dec. 31, $1.59 billion on March 31, 2015, and $1.68 billion on June 30, 2015. In the new report, the GDB projects total liquidity of $2.32 billion on Dec. 31, $1.82 billion on March 31, 2015, and $1.96 billion on June 30, 2015.

Larkin said, "I've developed a very cautionary view of the GDB because of their opacity and their unwillingness to be forthright. Their Oct. 17 disclosure is welcome by me but I have no expectation that it will continue in the future."

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