Puerto Rico’s House Of Cards Is Collapsing
For years, Puerto Rico has been borrowing from Peter to pay Paul, issuing bonds to pay the interest on its outstanding debt.
Now it appears that arrangement, which has turned into a house of cards, is collapsing.
Puerto Rico Bond Fund Crisis
Puerto Rico’s Governor said in June that the island plans to restructure a $72 billion debt burden that it can no longer afford.
Restructuring means that existing bondholders will take a huge haircut, or a sharp reduction, in the value of their bonds and interest payments.
Outright defaults on some bond issues and further credit downgrades appear to be imminent.
PRASA, Puerto Rico’s water utility, initially intended this Tuesday to sell $750 million of 30-year bonds with a jaw dropping yield of 9.5 percent, according to a Bloomberg report. That’s about triple the 3.2 percent yield for benchmark securities.
PRASA then said it was pushing the bond offering back to Thursday. That would give investors more time to kick the tires on the bonds, according to the common wisdom reported in the media.
This bond offering is extremely important for Mom and Pop owners of Puerto Rico bonds to watch. This is Puerto Rico’s first attempt to sell bonds since it defaulted on a debt payment just weeks ago.
If successful, the bonds will attract only the most speculative of investors, the majority of which will be hedge fund managers always hungry for a bargain.
However, there is a possibility that here could be few to no investors at all.
After being scheduled and rescheduled, now no one is saying when the bonds might be sold.
Indeed, the PRASA bond sale is now listed as day-to-day, according to a report on Friday from Bloomberg’s Michelle Kaske. And that’s even after adding bondholder protections and raising the preliminary yield levels to more than triple the level of benchmark securities.
“It’s a pretty difficult thing to try to raise money when out of the other side of your mouth you’re talking default and trying to pass laws that allow you to default,” one money manager told Kaske.
PRASA needs the proceeds of the bond sale to help repay a $90 million bank loan with Banco Popular that expires Aug.31, according to Kaske’s report. Other monies will finance infrastructure upgrades to help the utility meet clean-water requirements under a settlement agreement with the U.S. Environmental Protection Agency, according to bond documents.
Standard & Poor’s rates PRASA CCC-, its third-lowest junk grade, according to Kaske. S&P may downgrade the agency further because “events could unfold within the next three months that could expose PRASA to greater restructuring efforts,” according an analyst’s note from earlier this week.
That means the junk bonds are getting junkier. How will the market react to PRASA’s stalled $750 million offering?
Puerto Rico’s house of cards is falling apart. Mom and Pop bond investors should find cover, dig in and prepare for the worst.
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Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions. For more information about Zamansky LLC, please visit http://www.ubspuertoricofunds.com/.