Puerto Rico bonds rally as plan projects more money available for debt

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Puerto Rico general obligation bonds rallied Monday after Puerto Rico Gov. Ricardo Rosselló released a fiscal plan that appeared to more than double the money available for paying debt service.

In Monday morning trading on the secondary market, the low trading prices of Puerto Rico 8s maturing in 2035 were up 3 cents on the dollar and the high trading prices were up 6 cents from Friday levels. As of 2:30 p.m. the high trading price of the bonds on the Municipal Securities Rulemaking Board's EMMA website was 45 cents on the dollar.

Rosselló’s proposed fiscal plan, released Friday, indicated that there would be a net adjusted cumulative cash flow of $5.9 billion through fiscal year 2023. This is up from $2.85 billion in the same period found in the proposed fiscal plan he released on Feb. 12.

Those numbers compare with $20.2 billion in debt service due during that period from the fiscal plan entities. If all the cash flow were to be used for debt service, Friday’s plan would allow for 29.4% of debt service to be paid in the period.

“The $6 billion surplus is significantly higher than prior estimates and may have shifted the range for potential recovery values higher,” said Shaun Burgess, Cumberland portfolio manager and analyst. Cumberland owns insured Puerto Rico debt. “Prices on uninsured debt have risen dramatically."

He said, however, that the amount repaid “remains to be seen. The commonwealth and [Puerto Rico Oversight Board] have shown they are not bondholder friendly. I think this revised estimate though may make it harder for them to justify prior proposed haircuts or what they would like to see foisted on creditors. I would also add a note of caution. This number doesn’t mean bondholders are going to get more.”

Evercore Director of Municipal Bond Research Howard Cure said, “I still lack confidence in the numbers presented, which seem to fluctuate over a relatively small period of time.”

The Oversight Board had planned to meet Monday and certify the fiscal plans for Puerto Rico, Puerto Rico Electric Power Authority, and Puerto Rico Aqueduct and Sewer Authority. Late on Friday it announced that it would postpone the certifications and meeting to a later date, which it didn’t specify.

This is the latest of several postponements for adopting a new plan.

The board first adopted a 10-year fiscal plan for Puerto Rico’s central government and closely related authorities in March 2017. After Hurricane Maria struck the island in September, the board said the plan would have to be revised and cover a five fiscal year period. The board and the governor are still working on that plan.

Rosselló’s proposed version of the plan continues to ignore certain Oversight Board demands. For example, in a Feb. 5 letter the board directed for significant cuts to pension benefits and the new fiscal plan version has none of these cuts.

According to the El Vocero news website, Puerto Rico House of Representatives President Carlos Méndez Núñez and Puerto Rico's non-voting representative in Washington, Jenniffer González Colón, have expressed opposition to cutting pensions.

If the new plan were followed, the government plans to conquer impending deficits by five different broad approaches: introducing a new government model, reducing appropriations, reforming health care, increasing fees and tax compliance, and eliminating a special revenue fund deficit. The biggest financial contributors in fiscal year 2023 would be a new government model ($1.44 billion) and increasing tax compliance and fee enhancement ($1.17 billion).

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