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Puerto Rico's 'death spiral' gets a reprieve

*$1.9B payment was small chunk of $72B debt
*Padilla "death spiral" warning draws fire
*Goal was to get breathing room

Several days after Puerto Rico's governor declared his island's debts "not payable," a spate of borrowers there indicated just the opposite, making good on some $1.9 billion in debt payments that were due by Wednesday evening.

Late on the due date, two people involved with the various debt negotiations said that all the commonwealth's outstanding payments July 1 had been met. A separate statement from a unit of the bond insurer MBIA, which would have been responsible for covering a number of the missed payments, asserted that all the Puerto Rican entities that had faced interest fees or principal repayments that day had paid them.

The National Public Finance Guarantee Corporation, the public-finance insurer that is a subsidiary of MBIA, said in a news release that Puerto Rico's power authority, known as PREPA, and "all other Puerto Rico-related obligors with National-insured debt-service payments due July 1, 2015, made such payments as scheduled."

The payments, a small increment of Puerto Rico's $72 billion in cumulative debt, nonetheless renewed investor confidence in what some market participants worried was becoming a dire financial picture.

Earlier in the week, Puerto Rico Gov. Alejandro Garcia Padilla had said his island's troubled economy was in a "death spiral." A government-commissioned report, coauthored by a former International Monetary Fund official, had argued for drastic measures to reduce its debt load and improve a persistent revenue gap.

But by midday Wednesday, with news trickling out that two key sets of debt issues—$645 million in so-called "general-obligation" bonds, which enjoy broad creditor protections, and an additional $416 million in bonds issued by PREPA—had been paid, what had been a relatively gloomy sentiment toward the Caribbean territory reversed. Publicly traded GO bonds that mature in 2035 ticked up in price from their Tuesday lows to the high 60-cent range, and a class of bonds tied to PREPA held steady at about 60 cents on relatively low volume, traders said.

Pedestrians walk past a shuttered business in San Juan, Puerto Rico.
Getty Images
Pedestrians walk past a shuttered business in San Juan, Puerto Rico.

That, too, was a snapback from the prior day, when one investor had offloaded PREPA bonds in a small transaction valuing the debt at 53 cents on the dollar—minutes before word first surfaced of PREPA's surprise plans to pay its creditors, according to a market participant who noted the trade.

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Indeed, the temporary PREPA resolution was a high point for those preoccupied with Puerto Rico's ballooning debts.

That group includes not only a large swath of individual investors, who own the island's paper through bond funds managed by Oppenheimer Funds, Franklin Templeton, and others, but also dozens of hedge funds, including big players like Paulson & Co., BlueMountain Capital, Perry Capital, and others. Faced with $9 billion in debt, PREPA accounts for a substantial slice of Puerto Rico's overall debt load, and its crucial role in the 3.5 million-person commonwealth makes concerns about its longevity particularly pointed.

In an interview Wednesday outside PREPA's office in San Juan, Puerto Rico's capital, chief restructuring officer Lisa Donahue admitted that the day's resolution, which extended talks with creditors for another two months, had been hard-won.

"It was complicated, figuring out the best way to accomplish what we needed to accomplish which was, number one, avoid a default, and number two and most importantly, [to] preserve the liquidity of PREPA for the hurricane season," she said. "So I'm happy to say that by bringing all these creditors together, we were able to get a deal that works for everyone."

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One key part of PREPA's deal: to issue new short-term debt to three of its monoline-insurer creditors in order to raise $128 million to put toward Wednesday's $416 million total payment.

At first glance, it appeared that PREPA had layered more debt upon its already-formidable loan burden. But someone familiar with the transaction said that, in fact, it simply replaced principal debt that was about to be retired altogether with new, equally sized debt. (In simple terms, the move could be regarded as a "recycling of money," the person said, and was not as risky as it may have appeared.)

For her part, Donahue said that she was "not concerned at all" about the new terms of Wednesday's creditor pact, and that "we got adequate liquidity to operate, and that was what our goal was."

Even as the immediate risk of a Puerto Rican default subsided, however, political infighting on the island continued—with some arguing that Garcia Padilla's impassioned statements had been too divisive.

In an interview Tuesday outside the Puerto Rican Capitol building, Pedro Pierluisi, the island's delegate to Congress and a critic of the governor, argued that Puerto Rico's annual debt-service payments, while steep, were "manageable" and that talk of an economic collapse was unwarranted.

"We should avoid talking about any default or moratorium," he said. "That doesn't help anybody."

The governor himself largely retreated from public view after a weekend New York Times interview and a public speech on Monday evening in which he issued his stern warnings.

Throughout the next two days, his spokesmen declined to comment on the imminent debt payment deadlines as well as request for interviews. Instead, Garcia Padilla huddled behind closed doors with local lawmakers, mayors, and other community leaders, those officials said, to discuss longer-term solutions to Puerto Rico's financial struggle.