Puerto Rico Goes Bankrupt: 'There's Going To Be Losses'

Puerto Rico’s restructuring of $73 billion in debt — a bankruptcy four times the size of Detroit’s — has been a long time coming, analyst Cate Long said on Benzinga’s PreMarket Prep morning show Thursday.

The territory’s bankruptcy is not a Chapter 9 filing, as Detroit’s was, but rather follows a law signed June 30, 2016, by former President Barack Obama that spells out a debt restructuring process for the archipelago.

The Puerto Rico Clearinghouse analyst compared Puerto Rico’s debt stack — and the 500,000 bondholders who stand to take a haircut from it — to a cake.

“Depending on which of those slices you own … the recovery varies,” Long said, from as little of a recovery as 5 cents on the dollar at the bottom to 75 to 80 cents on the dollar the top.

“There’s going to be losses.”

The SPDR Nuveen S&P High Yield Municipal Bond ETF HYMB, which has about a 9-percent exposure to Puerto Rican bonds, dropped slightly in value after the market open Thursday.

The Market’s Reaction To Puerto Rico’s Woes

Long discussed Puerto Rico’s balance sheet with PreMarket Prep hosts Joel Elconin and Spencer Israel Thursday, including $50 billion in unfunded pension liabilities.

Other troubled states and municipalities, such as Chicago and Illinois as a whole, Philadelphia and Hartford, Connecticut, are watching Puerto Rico, Long said.

“We have a list of bad boys. It’s definitely going to make everybody wake up today and go back and look at their spreadsheets.”

Wednesday’s bankruptcy declaration may in fact bring stability by putting the matter into a federal judge’s hands, Long said.

“We’ve seen this train wreck coming for months and years,” she said. “It was a big explosion [and] it went through the media yesterday — but it’s also the start of a more orderly process.”

During the Detroit bankruptcy, then-U.S. Bankruptcy Judge Steven Rhodes issued a landmark ruling that retirees’ pension checks could be reduced. The city’s $18 billion bankruptcy rattled the historically stable municipal bond market.

A Tax Haven No More?

Act 22, a Puerto Rico law, allows mainland U.S. residents to move to the territory and be taxed at a rate of 4 percent, escaping federal taxation, Long said.

U.S. Sen. Orrin Hatch, a Utah Republican, “doesn’t like it,” Long said of Act 22.

“Long-term, it’s not something I would set up a business in Puerto Rico or buy a big house based on.”

Related Links:

Puerto Rico Could Be A Big Winner From Congressional Appropriations Battle

Puerto Rico Announces Restructuring Agreement With Some Bondholders, But Broader Crisis Remains

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