Puerto Rico’s fiscal plan raises cautious optimism

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The Puerto Rico Oversight Board's latest fiscal plan left bond investors and some analysts more optimistic about the prospects of repayment over the near term, while failing to resolve concerns over the local government's cooperation.

Cumberland Advisors Portfolio Manager Shaun Burgess pointed to exhibit 12 in the fiscal plan certified this week as being significantly more optimistic than exhibit 12 in the board’s June 29 certified fiscal plan. While Tuesday’s plan projects a $6.33 billion government surplus would be available from fiscal year 2018 to fiscal year 2019 even after paying debt service, the June 29-approved plan projected an $8.8 billion deficit under the same assumptions.

“There’s still a lot more money for creditors than they thought would be available to them,” Burgess said. Cumberland owns insured Puerto Rico debt. The plan “goes against the narrative of the Commonwealth [of Puerto Rico] that they are completely broke.”

While both plans show Puerto Rico deficits even without paying debt from the mid-2030s onward, people are skeptical about long-term projections, Burgess said.

BTIG Managing Director Mark Palmer, who covers insurers and Puerto Rico banks, also pointed to the surpluses in exhibit 12 as encouraging. “We believe the new fiscal plan is more creditor-friendly than prior iterations because Puerto Rico’s government and oversight board want the [Puerto Rico Sales Tax Finance Corp.] COFINA sales tax bond settlement to be consummated.”

Burgess noted, however, that Puerto Rico Gov. Ricardo Rosselló has said he plans imminently to file an appeal of Judge Laura Taylor Swain’s Aug. 7 decision in favor of the powers of the board over the governor. And the fiscal plan has a lot of execution risk, he said.

On Wednesday the El Vocero news website quoted the governor as saying he planned to not completely follow the board’s fiscal plan.

“It is unfortunate that there is such a lack of cooperation between the elected government officials in Puerto Rico and the Oversight Board,” said Howard Cure, director of municipal bond research at Evercore Wealth Management.

“This has clearly delayed negotiations with bondholders,” he said. “I think the disputes over how to structurally balance the budget has also delayed reforms to labor laws to make Puerto Rico an at-will employment jurisdiction in order to encourage new and established businesses to remain on the island and grow. The continued decline in the economy will prevent even the most austere budget from being balanced.”

At Tuesday's public hearing Board member Andrew Biggs said that in some ways the fiscal plan he was about to vote in favor was a failure because of the actions of the local government.

"Some who are in [the local] government, and here I think particularly of the legislature, may pat themselves on the backs because they were able to fend off the board's plans to reduce the amount of mandatory employee benefits or repeal Law 80 to allow for at-will employment. But they should remember this: there is much the federal government can provide for Puerto Rico and much that I would like the federal government to provide in order to speed the recovery and improve life here on the island."

"But when I return to Washington, D.C., the story I bring back is not one of great successes by the board but that the government and the political system of Puerto Rico are not willing or able to do what is necessary to bring the 3,000,000 American citizens living in Puerto Rico an American level of opportunity or an American standard of living," Biggs said.

After Puerto Rico’s general obligation bonds jumped up in value with the release of the Oversight Board’s draft fiscal plan on Monday, the bonds’ price receded on Tuesday when the board approved this plan, and continued to recede on Wednesday.

Puerto Rico Series 2014A GO bonds maturing in 2035 traded at 54.75 cents last week, 60.875 cents on Monday, 60 cents on Tuesday, and 59.3 cents on Wednesday.

Chip Barnett contributed to this story.

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PROMESA Commonwealth of Puerto Rico Puerto Rico Sales Tax Financing Corp (COFINA) Puerto Rico Infrastructure Financial Authority Puerto Rico Industrial Development Co Puerto Rico Public Buildings Authority Puerto Rico Public Finance Corporation Puerto Rico
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