Last week, the market got some good (and “good” is a relative term here) news with regard to Puerto Rico’s debt crisis.
The commonwealth - which you’ll recall is struggling to crawl from beneath a debt pile that sums to $70 billion - managed to strike a deal with PREPA’s creditors and the monolines that will see bondholders and lenders accept losses of 15% with the insurers putting up a $450 million surety bond.
PREPA owes more than $8 billion and the deal will represent the largest restructuring in muni history. As we noted on Friday, the island hopes the agreement will serve as a framework for discussions with other creditors, but Puerto Rico isn't out of the woods yet by any stretch of the imagination.
“The [PREPA] process was relatively smooth because the interests were fairly aligned on both sides,” Triet Nguyen, a managing director at NewOak Capital, tells Bloomberg. “When you get to the rest of the debt complex it’s a much messier process.”
As Bloomberg goes on to note, Puerto Rico could default before Congress returns from their New Year recess. The commonwealth needs to make $957 million of interest payments on January 1 and some of what’s due is GO debt.
The Catch 22 for Governor Governor Alejandro Padilla is that the more debt is sucessfully restructured, the less inclined Congress will be to allow bankruptcies. “The argument that’s been made in favor of Chapter 9 is that it’s the only means through which an organized, non-chaotic approach to Puerto Rico’s debt crisis can be put in place,” Mark Palmer, a managing director at BTIG LLC told Bloomberg by phone, before noting that the PREPA deal “would argue otherwise.”
Here's Padilla, underscoring just how messy things are likely to get: “The vast number of creditors with differing interests across all issuing entities would result in negotiations that are lengthy, costly and chaotic. Access to legal, broad restructuring authority would allow us to undertake these in an orderly manner.”
Additionally, the use of a revenue clawback to pay some $354 million that came due on December first suggests creditors may have to fight for scarce funds. "While Puerto Rico’s general-obligation bonds are given priority under its constitution, others are backed only by specific taxes or revenue," Bloomberg adds. "Creditors are gearing up for a fight over who gets paid first."
All of this raises questions about how the island will manage to provide public services and make government payrolls without risking a default on GO debt (which would trigger paiful litigation). As we noted last month, Padilla could face social unrest in the event people stop getting paid."Puerto Rico’s liquidity strains are 'serious' and will likely create 'greater levels of public unrest' into year-end," Height Securities analyst Daniel Hanson cautions, adding that the "island’s Treasury Single Account likely has negative cash balance, making it 'nearly impossible' to meet all government payroll obligations."
Well as we head into the holidays, bondholders will be less than pleased to learn that Puerto Rico has just paid out $120 million in Christmas bonuses. Here's Reuters:
Debt-ridden Puerto Rico started paying Christmas bonuses to public employees on Sunday and aims to complete the process within the next three days, the commonwealth government said.
It had been unable to confirm for weeks if it could meet the Dec. 20 deadline required under a 1969 law for the seasonal bonus. The payments total about $120 million, government officials said earlier this month.
Bonuses will be paid to government officials and regular employees of at least six months, and irregular employees who had worked at least 960 hours in a 12-month period.
We imagine this will temporarily keep the villagers from storming the castle with torches and pitchforks but make no mistake, the creditors are going to be beating down the door come January, and they're going to want a whole lot more than $120 million.
Additionally, we wonder how many of the employees receiving bonuses were involved in the fiscal mismanagement that got the island into its current debt conundrum.