Ricardo Rossell- Nevares' election as Puerto Rico's next governor is seen as positive for bondholders as the island's debt restructuring looms.
In Tuesday's contest Puerto Rico's voters gave Rossell- 41.2% of their votes, David Bernier 38.9%, Alexandra Lúgaro 11.1%, and the balance to minor party and unaffiliated candidates.
Rossell-'s victory is "bullish" for Puerto Rico general obligation bond holders, said Michael Ginestro, Bel Air Investment Advisors head of municipal credit research. "Rossell- has expressed highly bondholder friendly sentiments. He said he favors paying bond-holders interest if they agree to wait longer for principal payments. That's markedly different from the [departing Alejandro] Garcia Padilla administration, which has defaulted on $1.8 billion of debt-service costs."
Rossell- is a member of the New Progressive Party, Bernier is part of García Padilla's Popular Democratic Party, and Lúgaro is unaffiliated. The PDP has held Puerto Rico's governorship and a majority of seats in the commonwealth's Senate and House of Representatives for the last four years.
The PDP and the NPP are the dominant political parties in Puerto Rico. The PDP is in favor of Puerto Rico's government retaining its current status as a "commonwealth" rather than a state, though some of its members want to modify the commonwealth status. The NPP is in favor of Puerto Rico becoming a state.
Under the Puerto Rico Oversight, Management, and Economic Stability Act signed into law this year by President Obama, an oversight board has been appointed to work with and potentially overrule the local government to improve the island's economy and restructure the debt.
"The recovery plan adopted by the PROMESA board will likely be written by and generally be consistent with the priorities of the new governor," Ginestro said.
Puerto Rico's GO bond yields have been rallying on the secondary market, perhaps on expectations that Rossell- would win the election. Puerto Rico's 2014 GO bond with a maturity in 2035 was sold on Oct. 10 at 65.5 cents on the dollar but had risen to 71.5 cents as of late Wednesday, according to data from IHS Markit. Bondholder-friendly rhetoric from Rossell- spurred the rally, wrote Municipal Market Analytics partner Matt Fabian.
"Because MMA continues to believe that the fiscal plan ultimately adopted by the PROMESA board will be written by, and generally consistent with the general priorities of whatever administration sits in [the governor's office] at the time, who exactly is the governor actually matters quite a bit," Fabian continued. "This is thus a crucial election with respect to bondholder recoveries."
However, Fabian suggested that if the price goes above 70 cents on the dollar bondholders should sell for cash, since the debt restructuring will probably involve a payout in Puerto Rico certificates. Cash is a much better alternative, he said.
"As a Puerto Rican and investor and a strong advocate of a transparent and responsible public finance markets, I welcome the change in government," said Hector Negroni, partner at Fundamental Advisors. "The return of the rule of law and sound governance combined with the new administration's growth agenda will restore credibility, pride and prosperity to my fellow American citizens living in Puerto Rico."
Alliance Bernstein's director of municipal credit research, Joseph Rosenblum, was more skeptical about the governor's influence. "I believe that PROMESA will be driving the process rather than the governor. Perhaps more important is the question of how a Republican led Congress and president will react to requests for additional funding, especially in the area of healthcare."
Writing before the election, Fabian also said that he was skeptical that "even a half-Democratic Congress will find the means to afford tens of billions of dollars in incremental aid (and/or guaranties) for the commonwealth." U.S. voters Tuesday gave control of both houses of Congress to Republicans.
On Tuesday NPP member Jenniffer González Col-n was elected resident commissioner.
The NPP also gained control of the Puerto Rico Senate and House of Representatives. In the Senate that has been seated since January 2013 the PDP has had 18 members, the NPP has had eight members and the Independence Party has had one member. In the Puerto Rico House of Representatives the PDP has had 28 members and the NPP has had 23 members.
While the race outcomes were not yet clear, on Wednesday afternoon it appeared that in the Senate there will be 19 NPP members, six PDP members, one Independence Party member, and one unaligned member. In the House, it appears that the NPP will have about 33, the PDP will have 15, and the Independence Party will have one. As of early Wednesday afternoon, there were two races that were too close to call in the House.
