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Washington clipper

15 October 2015 By Kevin Allison

The U.S. Treasury’s Puerto Rico superbond idea looks half baked. The cash-strapped Caribbean territory and the federal government in Washington are said to be mulling a plan to swap some of the island’s $72 billion of debt for a new debenture that would be paid from a U.S. Treasury-administered kitty. The idea is politically fraught and may not work – and a poor substitute for a financial control board or Chapter 9 bankruptcy.

The proposal rests on the theory that Puerto Rico’s debt holders might be willing to take a haircut on the money they are owed if it means they have a greater chance of getting repaid. Putting Treasury in charge of transfers from taxpayers to bondholders means creditors wouldn’t need to worry about a desperate San Juan government funneling cash elsewhere. Federal administrators might also be able to improve tax collection, making more money available for repayment.

There are some problems. For one thing, Puerto Rico’s lawmakers – and presumably, the U.S. Congress – would have to agree to the arrangement. That could be a stretch given local sensitivities and the lack of political will in Washington to address the island’s problems, although the fact that Treasury is involved in finding solutions does represent progress.

Convincing creditors to go along could be trickier. Owners of Puerto Rico’s $13 billion of outstanding general obligation debt or $16 billion of sales tax revenue bonds might dig in their heels, prompting lawsuits that make the plan a nightmare to implement.

Puerto Rico’s general obligation debt today trades at about 75 cents on the dollar ahead of a possible cash crunch next month. Yields barely moved after the Treasury discussions came to light in the Wall Street Journal this week. The island faces more than $18 billion in debt-service payments alone between 2016 and 2020, according to a recent report from a working group set up by Governor Alejandro Garcia Padilla. Best case, with reforms and a return to growth, the island would still face a $14 billion funding gap, according to a Barclays review of the group’s findings.

Even if Treasury boss Jack Lew’s superbond could somehow be implemented, it would leave needed institutional reforms to Puerto Rico’s finances unaddressed. That makes it a partial solution at best.



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