Height Securities’ Daniel Hanson is “deeply skeptical” about the viability of Puerto Rico’s proposal for restructuring the island’s $70 billion in debt.
Hanson, in a note out late last week, said Governor Alejandro Padilla was “significantly unlikely” to present a “credible” plan and that the commonwealth’s offer to creditors may be “laughably low.”
As a reminder, Puerto Rico defaulted on some of its non-GO debt last month, presaging more missed payments this year as creditors come calling in May and July.
So far, the island has been able to avoid a messy default on its GO debt by utilizing a revenue "clawback" mechanism that effectively allows the commonwealth to divert money earmarked for non-GO debt, a move decried by the monolines.
In December, the market thought there might be a light at the end of the tunnel when creditors and the island's power utility managed to get the bond insurers to go along with a $8 billion restructuring for PREPA, but that fell apart a week ago when lawmakers failed to vote on a new tax. Ultimately, the deadline to pass the bill was extended to February 16, but the fraugh negotiations underscore how precarious the situation has become.
On Monday, we got our first look at Puerto Rico's opening salvo in what's likely to be protracted battle to tackle the entire debt burden.
"Puerto Rico on Monday announced a major exchange offer to creditors that could reduce its debt by about $23 billion, the opening salvo in efforts to resolve the island's crippling $70 billion debt crisis," Reuters reports, adding that "the new plan would reduce a $49.2 billion chunk of Puerto Rico's debt by about 46 percent, to $26.5 billion, by offering creditors payout reductions under a new, so-called "base bond" with better legal protections."
GO bond holders would take a 28% hit, COFINA holders would lose 51%, and everyone else would take a 61% haircut. Here's how the scheme will work:
On the bright side, creditors would receive "growth bonds" designed to make up for the losses. The payout on those securities will be tied to the island's economy and as you might recall, things aren't going so well. Here's a table from Moody's Analytics would should give you an idea about how valuable these "growth bonds" are likey to be:
"Interest payment on the base bond would begin in 2018 (so that's a two year moratorium), reaching 5 percent a year by 2021, while payouts on the growth bond would begin 10 years after the close of the offer," Reuters continues. The base would give creditors the rights to tax receipts as a security measure.
Obviously, this isn't likely to go over well with creditors, but then again, bond holders probably knew the proposal would be, to quote Height Securities' Daniel Hanson again, "laughable."
Of course no one will be laughing if the deal doesn't get done and the island crashes into a messy GO default triggering a nightmarish deluge of costly litigation.
We'll close the way we began - with a quote from Daniel Hanson:
"Puerto Rico debt restructuring proposal isn’t credible. The targets are “wholly unrealistic,” and require creditors to trust Puerto Rico will make good faith effort to repay them."
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Full proposal
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