Two years into Puerto Rico Gov. Alejandro García Padilla's tenure, municipal bond market analysts are generally negative about his second year and concerned about the commonwealth's future.
This is a shift from how most analysts in January 2014 saw the governor's first year.
Several commentators said they were particularly concerned by the governor's introduction of a public corporation bankruptcy mechanism and the Puerto Rico Electric Power Authority's apparent plan to restructure its bond obligations in March.
Michael Ginestro, director of municipal research at Bel Air Investment Advisors, recalled the governor in a March 2013 speech gaining applause from investors after saying that trust was very important to him. However, 13 months later the governor signed the Puerto Rico Corporations Debt Enforcement and Recovery Act, introducing a bankruptcy process for four public corporations. With this introduction, Ginestro said the governor lost a lot of credibility.
Richard Larkin, senior credit analyst at H.J. Sims & Co., said as a result of bad advice from advisors such as those at the Government Development Bank for Puerto Rico, the governor naively believes that the Recovery Act, by giving the public corporations a means to solve their financial problems without resorting to commonwealth financial support, protects the commonwealth's general credit in the market.
"I'd hope as we become close to the day of reckoning, probably mid-March, the government will recognize that PREPA's default would be a fatal blow to Puerto Rico's ability to borrow at reasonable interest rates," Larkin said.
While also negative, Municipal Market Analytics managing director Robert Donahue was more nuanced and pointed to a wider array of developments.
"We acknowledge the governor was dealt a weak hand from the onset of his term," Donahue said. "Many of the island's problems are beyond his control: a stagnant economy, a bloated bureaucracy, high legacy cost structure, unsustainable debt levels, revenue volatility and now the uncertain impact of Cuba's opening. We also acknowledge that he has consistently shown commitment to the needs of investors."
However, from an investor's perspective, the governor's performance in 2014 was "subpar," he said.
The governor successfully sold a needed $3.5 billion bond in March. However, Donahue said this was followed by a series of problems: "Investors were particularly hurt by the abrupt, ill-timed rollout of the Recovery Act in June, a hastily packaged forbearance agreement in August, difficulties placing a tax and revenue anticipation note in September followed by legislative turmoil surrounding the petroleum tax hike and delayed Puerto Rico Infrastructure Finance Authority bond issue in December."
"Garcia Padilla is now straddling a widening gulf between his political constituents who want lower taxes and better services, and investors who are calling for austerity and budgetary balance," Donahue continued. The governor has made changes to leading positions in his government with an eye on their political implications for the 2016 election, he said.
"As we head into 2015, some of the alternative investors who provided capital and forbearance last year have lost confidence in the island," Donahue said. Puerto Rico may have a hard time in attracting sufficient investors in any upcoming bond issues.
AllianceBernstein director of municipal credit research Joseph Rosenblum also saw good and bad in the past year, noting "the results have been at best mixed."
"On the plus side, they were able to pass a budget that while not structurally balanced, showed it in better shape than prior years," Rosenblum said. "They enhanced liquidity through sale of the general obligation bonds and TRANs. And they did sponsor some [investor] calls and regular releases of disclosure."
"But I believe there is still a sense that the challenges remain huge," Rosenblum continued. "I don't see structural balance in their general fund finances; liquidity remains a major challenge; no clear sense of what the engine of economic growth is and when the economy is likely to turn around in a manner that can sustain their debt level; no idea about their debt restructuring plans."
Triet Nguyen, managing director at NewOak, said he thought the economy was still declining, and gives the García Padilla adminstration's second year a grade of 'C.'
"Although the financial team, led by now Government Development Bank for Puerto Rico President Melba Acosta Febo, has done a decent job dealing with a difficult economic and fiscal situation, very little progress was actually made last year," Nguyen said. "Puerto Rico continues to be caught in this vicious circle of having to raise taxes to remedy fiscal problems and then hurting the economy in the process. The Puerto Rico economy has yet to stabilize."
Nguyen credits the governor and his team for "starting down the critically-needed path of tax reform," but notes that effort "didn't begin in earnest" until the middle of the year.
"Overall, we think the García Padilla administration has wasted an opportunity to take advantage of relatively benign market conditions in 2014 and make difficult decisions," Nguyen said. "Things can only get harder going into 2015."
García Padilla had a more positive take on his time as governor. In a statement to The Bond Buyer he said, "We are proud of the work we have performed over the last two years in stabilizing the government's finances. Successfully completing the fiscal stabilization plan is essential to continue jumpstarting the economy while working on diversifying our industrial base. Structural changes to the economy, including a comprehensive tax reform and a PREPA overhaul, will top the agenda in 2015. I feel profoundly optimistic about Puerto Rico's future."
Several Puerto Rico-based economists also contributed their thoughts about the governor's second year.
"From our perspective, the effort to present a balanced budget for fiscal year 2015, the approval of Act 66 [also known as the Special Law for Government Fiscal and Operational Stability adopted in June] aimed to reduce expenditures, and the appointment of the chief restructuring officer at PREPA are valuable initiatives," said Gustavo Velez, chairman of Intelígencia Econ-mica, a consulting company.
"Nevertheless, they haven't shown the willingness to implement the structural reforms to fix the fiscal problem, such as restructuring the public corporations, besides PREPA, and control government expenditures," Velez continued. "Puerto Rico is running out of time, and I don't see a comprehensive fiscal-economic plan."
Velez said haircuts may be necessary for the Puerto Rico Highways and Transportation Authority debt.
Vicente Feliciano, president of Advantage Business Consulting, also had a mixed view of the governor's year. "Gov. García Padilla must be commended for effort. Results are still difficult to come by."
The government raised its taxes and cut spending to reduce its deficit in fiscal year 2014. As a result the economy contracted.
Additionally, the price of oil collapsed, something Feliciano said the government is now benefitting from.
"This windfall provides the García Padilla administration with flexibility as it moves into 2015," Feliciano said.
The governor is trying to use this collapse to introduce an oil tax rise to deal with debt problems at the Puerto Rico Highways and Transportation Authority, Feliciano said, noting there is strong opposition to the oil tax hike in the legislature and in society.
"It is not that the new oil tax is particularly large, but rather that the political underpinnings of the policy of austerity are starting to give way," Feliciano said.
Antonio Fernos-Sagabien, principal of REOF Capital LLC, said that while the economy remained weak, it was good that the governor had a stable economic development team, which "began developing a more cohesive story on their strategy and some concrete results have been achieved."
Yet the team still has substantial challenges. They need increased confidence in the government's economic management, and structural changes both at Puerto Rico's micro level and in the commonwealth's relationship with the United States.
On the financial front, the weak economy was a key problem, Fernos-Sagabien said.
The lack of information about the coming major tax reform is a problem, he said. This has led to uncertainty, which in turn has led to anxious investors.
There will be a big risk in the implementation period of the planned value-added tax, Fernos-Sagabien said. It will take at least 18 months to get the tax fully operational.
Another financial challenge is how big a haircut PREPA will demand from bondholders. "Retirement's, Public Buildings Authority's, and the Port Authority's fiscal positions are close to bankruptcy with nobody knowing what the government's next move will be."
