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Which Puerto Rico Bond Defaults Next? 42% Yields Provide a Clue

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Opinions vary on how to fix Puerto Rico’s $70 billion debt crisis, but analysts, investors, credit-rating companies and even Governor Alejandro Garcia Padilla agree on one thing: the commonwealth will default in 2016. The question is, will it happen as soon as Jan. 1?

Puerto Rico and its agencies owe nearly $1 billion in interest payments Friday, including $357 million on general-obligation debt that the Caribbean island’s constitution says must be paid before everything else. Officials have until late Monday night because of the New Year’s holiday. One agency that’s unlikely to default: The Puerto Rico Electric Power Authority, which plans to make good on its Jan. 1 payment as part of a debt-restructuring deal reached last week.

The governor, who won’t seek re-election in 2016, said last week that making all the debt payments will be “almost impossible.” He has stressed repeatedly that if forced to choose between paying creditors and keeping essential services running, he will choose the latter.

Garcia Padilla this month started redirecting revenue used to repay certain agency debt to the central government’s coffers. As a result, the Infrastructure Financing Authority, the Highways & Transportation Authority and the Convention Center District Authority said they’ll use reserves to help pay their investors on Jan. 1.

Only one Puerto Rico entity has already skipped debt payments. The Public Finance Corp., which borrowed to help cover the government’s budget deficits, in August failed to pay principal and interest because lawmakers didn’t appropriate the funds. Its bonds due in 2031 trade for about six cents on the dollar. Because they’re backed by a weaker legal pledge than other securities, there have been few repercussions.

Puerto Rico Graphic 

Garcia Padilla is seeking to reduce the island’s debt by asking investors to accept less than full payment. If there’s a default, bondholders may sue for repayment, sparking a legal battle that could upset efforts to negotiate a debt-restructuring agreement.

What follows are the most recent trading prices of bonds with interest payments due January or February and that aren’t insured against default, according to data compiled by Bloomberg. They are listed from the highest yields (which represents the most risk) to the lowest.

  • Puerto Rico Infrastructure Financing Authority: $1.9 billion. Called Prifa, the agency has sold the island’s rum-tax bonds. These are securities repaid from federal excise taxes on rum made in Puerto Rico. The central government this month started using the agency’s revenue to repay its direct debt. Prifa owes $37.2 million of interest in January, which it expects to pay with reserve cash, according to a Dec. 8 event notice posted on the Municipal Securities Rulemaking Board’s website, known as EMMA. A $245.9 million commonwealth-guaranteed note matures in May and another $77.8 million of principal and interest is due in July. Bonds maturing in 2046 last traded for an average yield of about 41.9 percent.
  • Puerto Rico Government Development Bank: $5.1 billion. The GDB lends to the commonwealth and its localities. When those loans are repaid, the bank can pay off its debt. The bank owes $9 million on Jan. 1 after paying $354 million of principal and interest in December. Tax-exempt bonds maturing in 2020 last traded for an average yield of 41.8 percent.
  • Puerto Rico Highways & Transportation Authority: $4.6 billion. The highway agency repays its debt with gas-tax revenue. It owes $106 million of interest in January, which the agency expects to pay in full with reserve funds after the commonwealth began diverting the agency’s revenue to pay general-obligation securities, according to a Dec. 8 event notice posted on EMMA. Another $220.7 million of principal and interest is due in July. Bonds maturing July 2026 last traded for an average yield of 39.3 percent.
  • Puerto Rico Pension-Obligation Bonds: $2.9 billion. The taxable debt was sold to bolster the island’s nearly depleted pension fund. The bonds are repaid from contributions that the commonwealth and municipalities make to the retirement system. The system pays $13.9 million of interest every month in this budget year. Securities maturing in 2038 last traded for an average yield of 24.5 percent.
  • General-obligations: $12.6 billion. The debt backed by the commonwealth’s full faith and credit. The island’s constitution says general obligations must be repaid before other expenses. Puerto Rico owes $357 million of interest in January and an additional $805 million of principal and interest is due July 1. Securities with a 5 percent coupon and maturing 2041 last traded for an average yield of 8.96 percent. Debt with an 8 percent coupon and due in 2035 last traded for an average yield of 11.7 percent.
  • Puerto Rico Public Buildings Authority: $4.1 billion. The PBA bonds are repaid with lease revenue that public agencies pay for their office buildings. The debt is more secure than typical revenue bonds because the commonwealth has guaranteed repayment. The agency owes $102.4 million of interest in January and $208 million of principal and interest in July. Bonds maturing 2042 last traded for an average yield of 10.6 percent.
  • Puerto Rico Sales Tax Financing Corp.: $15.2 billion. The bonds, called Cofinas, are repaid from dedicated sales-tax revenue and come in two types: senior, with the first claim on revenue, and subordinated, which are second in line. A $1.2 million interest payment is due in February. The authority will make debt payments through August 2016 because revenue for those deadlines has already been delivered to the bond trustee, according to a Dec. 3 Standard & Poor’s report. Senior Cofinas maturing in 2040 last traded for an average yield of 10.4 percent, while subordinate ones maturing 2039 yielded 15.2 percent.
  • Puerto Rico Electric Power Authority: $8.2 billion. Prepa, as it’s called, is the island’s main supplier of electricity and repays the debt from what it charges customers. The utility will avoid defaulting on a $196 million interest payment due Jan. 1 and another $128 million payment to bond insurers Assured Guaranty Ltd. and MBIA’s National Public Finance Guarantee Corp. after reaching an agreement last week with the insurers and bondholders where investors will accept a 15 percent loss. Bonds maturing in 2037 last traded at an average yield of 9.4 percent.
  • Puerto Rico Aqueduct & Sewer Authority: $4.1 billion. The utility, called Prasa, supplies most of the island’s water. The debt is repaid from water rates charged to customers. The water agency owes $86.5 million of interest in January and $135.1 million of principal and interest in July. Bonds maturing in 2042 last traded at a yield of 9.1 percent.
  • Puerto Rico Convention Center District Authority: $397.7 million. The agency oversees Puerto Rico’s Convention Center and other facilities and receives hotel-room tax receipts to repay its debt. It will make its January interest payment in full by using reserve funds, according to a Dec. 8 event notice posted on EMMA. Insured bonds maturing 2031 last traded for an average yield of 6.1 percent.


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