Is Puerto Rico the Next Greece?

Puerto Rico is facing a significant debt crisis as $58 million in bond payments become due in the next few days. Saturday could represent the first of a range of missed payments that are likely to plunge the island protectorate into default status.

Last month saw statements from Governor Alejandro Garcia Padilla that highlighted the unsustainable nature of the debt and the need for negotiations. The current debt load has reached approximately $72 billion and it is clear that a restructuring is likely the only way forward.

The impending default is likely not a surprise to the vast majority of bond holders considering that the main financing unit of the Puerto Rican Government, the Public Finance Corp, notified holders that no provision for August’s payments had been set aside. In fact, the missed transfer had some ratings agencies and analysts suggesting that a default was all but assured at this stage.

At this juncture, the United States has stepped in to help reorganize the island nation, but it remains to be seen if this will simply mean the extension of bond maturity dates or whether it will involve much needed debt relief.

The reality is that many investors were attracted to Puerto Rico’s tax free status and economic connection to the United States. Investors were also attracted to legislation that, like Detroit, effectively bars the island nation from claiming bankruptcy protection from creditors. On the face of it, this is an attractive proposition that effectively guarantees the intervention of the U.S Government. However, Puerto Rico is lobbying for exemptions that would allow some of their bond issuing entities to access bankruptcy protection.

At this stage, the advantages of investing in Puerto Rico are looking murky at best and subsequently the debt restructure is likely to become problematic and messy. The final week in August will be a key period in negotiations as policy makers are preparing to present a deal to creditors. Regardless of the outcome of the meeting it is clear that bond holders are facing a significant rout.

Ultimately, the pain is likely to be borne by the Puerto Rican people as the government will need to reduce a range of services and expenditure to satisfy the terms of any potential restructure.