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June 30, 2016 at 11:10 AM
Even after President Barack Obama signs the long-awaited bill that lets Puerto Rico restructure its debt, the ultimate outcome for holders of the island’s debt remains uncertain.
“Investors don’t know … how much debt they can support,” says Lyle Fitterer, who leads the tax-exempt fixed income team at Wells Fargo Asset Management.
In order to answer that question, investors need an audit of the island’s financials and knowledge about how Puerto Rico will treat its pension obligations – whose unfunded liability tops $40 billion – versus its debt obligations, which total $72 billion, says Fitterer.
Knowing how much debt Puerto Rico can support will provide investors some idea of how much of a haircut, or discount, they can expect for the bonds they hold, says Fitterer, who spoke with ThinkAdvisor at a UBS global investment forum in New York. Then who gets paid first – pensioners or bondholders – is key.
Another unknown for investors: the composition of the board that will restructure Puerto Rico’s debt under the bill, known as PROMESA, for Puerto Rico Oversight, Management and Economic Stability Act.
The board will have seven members — four Republicans and three Democrats — chosen by Obama from a list compiled by House Majority Leader Paul Ryan R-Wis., and Senate Majority Leader Mitch McConnell, R-Ky.
