As demonstrators waved Puerto Rico flags, shook maracas and held signs that read “U.S. banks play roulette and the people pay the debt,” commonwealth officials won little support among investors for plans to restructure the island’s $72 billion debt burden.
Participants from among the more than 300 representatives of institutional investment firms, hedge funds and insurance companies that assembled at Citigroup Inc.’s New York headquarters Monday to hear Puerto Rico officials make their case said they were left with no new clarity on which of the island’s long-term obligations will undergo the most change. Officials have yet to say whether the cash-strapped island will repay bonds maturing in 19 days.
“They can’t go much further into negotiations without some specifics,” Joseph Rosenblum, director of municipal credit in New York at AllianceBernstein Holding LP, which manages $32 billion of municipal bonds, including Puerto Rico securities, said outside Citigroup’s Park Ave. offices after attending the meeting. “And they’re just not there yet.”
Creditors wanted to hear more after the island said it planned to craft a debt restructuring plan by Aug. 30. The meeting focused on a report prepared for Puerto Rico by three former International Monetary Fund officials. Released two weeks ago, it recommends that the island persuade investors to exchange old bonds for new ones with later maturities and lower debt payments.
Opening Move
It was Puerto Rico’s first meeting with investors after Governor Alejandro Garcia Padilla last month said the junk-rated commonwealth can’t afford to pay its debts. Prices on Puerto Rico bonds have fallen amid concern that the island of 3.5 million is veering toward an unprecedented default, after selling more debt than any U.S. state except New York or California.
Melba Acosta, president of the Government Development Bank, which handles the island’s debt sales, said during the meeting that it was “premature” to discuss which securities may be affected until officials develop a plan to improve the island’s finances.
“I ask for your patience while we develop a credible plan,” she said during the address, which was broadcast live on the Internet.
Greece Echoes
After the meeting, investors leaving the bank were met by about 30 protesters chanting “you broke it, you fix it.” The protesters are seeking to counteract calls for greater austerity on the island, where unemployment is double the rate in the U.S. and has drawn comparison to the economic turmoil in Greece.
About 350 people were in attendance while more than 3,000 others watched online or listened via a conference call, Barbara Morgan, a spokeswoman for the Government Development Bank in New York at SKDKnickerbocker, said in an e-mail.
Getting investors to take a loss won’t come easily. Holders of general obligations have the commonwealth’s constitutional pledge that such debt must be repaid before other expenditures. Investors of sales-tax debt have that dedicated revenue stream backing the bonds. OppenheimerFunds Inc., the biggest mutual- fund holder of Puerto Rico debt, previously said it’s “ready to defend” its investments.
Utility Rallies
One utility issuer may fare better than its sister agencies, Jim Millstein, a former Treasury Department official who is advising Puerto Rico, said during the meeting. The Aqueduct and Sewer Authority, called Prasa, is set to raise water rates and “should be able to meet its existing financial commitments without modification,” he said.
The water utility’s debt rallied afterward. The most actively traded Prasa bonds, which mature in July 2037, rose as high as 71.5 cents on the dollar, the most since June 3. Last week, the debt averaged 64.2 cents on the dollar. A $1 million block of Prasa securities maturing July 2044 traded for as much as 73.5 cents, the highest since December.
Millstein said Puerto Rico wants to avoid litigation that would prolong the process.
“We are hopeful that we can preempt that with an open and transparent process,” he said.
Long Needed
Puerto Rico’s troubles aren’t new. The commonwealth and its agencies have a history of borrowing to balance their budgets as the island’s economy has struggled to grow since 2006. Its population has shrunk by 7 percent in the past decade as residents look for employment on the U.S. mainland.
“This presentation would’ve been better if it would’ve been done a long time ago,” said David Tawil, who manages $80 million as co-founder of hedge fund Maglan Capital in New York and watched the meeting online. “It was short on specifics; it was grand in generalities.”
Puerto Rico bonds have traded at distressed levels for two years as investors doubt whether they will be paid on time and in full. General obligations maturing July 2035 and sold in March 2014 at 93 cents on the dollar traded Monday at an average 70.6 cents on the dollar, the highest since July 6, data compiled by Bloomberg show. The debt fell to as low as 66.6 cents on June 30, the day after the governor made the case for a restructuring in a televised speech.
Debt Payment
The island faces a $93.7 million debt-service payment due July 15 on Public Finance Corp. bonds. Another $140 million of GDB bonds mature Aug. 1, according to data compiled by Bloomberg.
Many investors were anticipating that the presentation wouldn’t produce specifics on potential changes to the debt.
“This is a restructuring discussion,” Gary Pzegeo, who helps manage $27 billion as head of fixed income in Boston at Atlantic Trust Private Wealth Management, said in a telephone interview. “There’s not a lot that they can make public at this point.”
Monday’s meeting was the start of such conversations between Puerto Rico and its creditors.
“They weren’t very specific, but the process continues,” AllianceBernstein’s Rosenblum said. “It’s got to go through these steps.”
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