Caribbean Business summarizes a recent article by Barron’s cover article (24 August 2013), saying that “Wall Street financial publications are taking a closer look and Puerto Rico’s economic and fiscal landscape as the island government jumps back into the $3.7 trillion U.S. municipal bond market.” Here are excerpts from the CB report with links to both articles below. [Many thanks to Taí Fernández, for bringing this item to our attention.]
Puerto Rico appears on track to issue some $600 million in general obligations late next month in a refinancing deal positioned as the first in a string of deals to refinance more than $3 billion in existing debt before year’s end. “The municipal-bond market has been rattled by Detroit’s bankruptcy, but an even bigger problem may be developing in the Caribbean, where Puerto Rico is grappling with a stubbornly weak economy, persistent budget deficits, and onerous debt” [. . .].
The $600 million GO deal hinges on the government meeting its new mid-September target date to release its delayed comprehensive annual financial report (CAFR) for fiscal 2012. Barron’s said the delay in financial reporting doesn’t help investor confidence. Wall Street investors are again expected to require yields in the 7 percent range, as they did earlier this month when the Puerto Rico Electric Power Authority issued $673 million in bonds as the commonwealth returned U.S. municipal bond market for the first time in more than a year.
The premium paid to sell the BBB-rated bonds reflect investor concerns over perceived higher risks regarding Puerto Rico. Standard & Poor’s, Moody’s Investor Service and Fitch Ratings all peg Puerto Rico’s GO bonds at just one notch above junk, or non-investment, grade and have warned that further downgrades are possible despite pension reform and new taxes to narrow chronic budget deficits. [. . .] The Barron’s report takes a sharp look at Puerto Rico’s sky-high debt: $53 billion of tax-supported debt outstanding from more than a dozen issuers and nearly $70 billion of total debt.
“Even using the lower figure, Puerto Rico’s debt load would rank third among the states, behind only California and New York. And its debt burden relative to key financial measures—gross domestic product, personal income, and population—is off the charts. Puerto Rico’s debt per capita, for instance, of $14,000 is 10 times the average of the 50 states,” Barron’s reported.
The report credits the government with taking painful steps to shore up its finances through steep new taxes, deep pension cuts and belt-tightening. Still, there are few signs that the battered island economy is pulling out of a downturn dating back to 2006.
[. . .] Troy Willis, a vice president and senior portfolio manager at OppenheimerFunds, cited to Barron’s a “drumbeat of negativity” from the rating agencies and others. He says investors underestimate the ability of governments to raise needed revenue, and he argues the risk/reward in Puerto Rico debt is “pretty compelling” at current levels. “Puerto Rico is moving in the right direction,” he told Barron’s. “It’s cutting the budget deficit and could have a structurally balanced budget in a year. That’s a lot more than you can say for the federal government.”
To read the full Barron’s report, “Troubling Winds,” see http://online.barrons.com/article/SB50001424052748704719204579022892632785548.html?mod=BOL_hpp_cover#articleTabs_article%3D0