As yet another key debt payment date closes in on Puerto Rico, here's a primer on what you should know, and who it will affect the most ahead of the deadline.
Q: If the Puerto Rico Public Finance Corporation (PFC) doesn't pay bondholders on Aug. 1, will it be considered a default?
A: Yes. According to Moody's vice president and senior credit officer, Ted Hampton, if there is no payment made on Friday, it will be the first default of a U.S. state, or state-like entity, since Arkansas couldn't make its bond payments during the Great Depression in 1933.
Q: What should Puerto Rico's bondholders do?
A: The outlook for Puerto Rico bondholders is rather bleak, said Nick Venditti, a portfolio manager at Thornburg Investment Management.
"If you're an investor in a heavily overweighted Puerto Rico municipal bond mutual fund, or have direct exposure to Puerto Rico's debt, your best-case scenario is to sell right now," Venditti said. "You won't be able to get a better dollar value return on your Puerto Rico investment than what it's trading at right now."
Q: How much money is due on Friday?
A: Puerto Rico's Public Finance Corporation, a subsidiary of the U.S. territory's Government Development Bank, owes bondholders $58 million. Puerto Rico will likely default on this payment due to PFC's failure to transfer $93.7 million on July 15 to the bond trustee.
The nonappropriation of the $93.7 million caused Standard & Poor's to lower its rating on PFC's bonds, saying it sees "default for this debt … as a virtual certainty." The rating agency also placed all other Puerto Rico tax-backed debt on its CreditWatch with negative implications.
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On Monday, Victor Suarez, chief of staff to Gov. Alejandro Garcia Padilla, reiterated that the commonwealth didn't have the cash flow to pay the principal and interest on the PFC bonds.
Some other payments are also due on Friday, including $140 million owed by the Government Development Bank.
Q: Why can't Puerto Rico file for bankruptcy like Detroit?
A: Under current U.S. Bankruptcy Code, only municipalities, not a state or local government, are eligible for Chapter 9 bankruptcy protection. Resident Commissioner Pedro Pierluisi, the U.S. territory's sole congressional representative, introduced a bill that would allow Puerto Rico's public corporations and municipalities to file for Chapter 9 bankruptcy protection.
The proposal has gained some support. On July 15, Sens. Charles Schumer, D-N.Y., and Richard Blumenthal, D-Conn.,introduced legislation that would amend the bankruptcy code to allow Puerto Rico to restructure its debt under the supervision of a bankruptcy court.
Q: What other payments are due in August?
A: Puerto Rico based-issuers are forecast to have about $635 million in limited payment obligations due in August—which is a small portion of the estimated $5.4 billion in total payments due over the next 12 months, according to a recent report issued by JPMorgan's municipal strategy team.
The Puerto Rico Sales Tax Financing Corporation (Cofina), a subsidiary of Puerto Rico's GDB, has the largest total obligations due through the remainder of 2015, with $319 million due, with the majority of this amount, $252 million, due in August.
JPMorgan's report also identifies Cofina as "the Commonwealth's largest issuer with $16 billion of outstanding debt or 22.5 percent of the island's debt burden."
Q: Where do things stand with the power authority and its creditors?
A: Puerto Rico was able to narrowly avoid its first default at the end of June, when the Puerto Rico Electric Power Authority, or Prepa, reached a last-minute deal with its creditors, which allowed it to make the July 1 debt payment in full.
Prepa was able to secure $128 million of bridge loans through insurers, allowing it to make the $415 million bond payment on time.
On July 23, Prepa bondholders made public a proposal to restructure the $8 billion in debt. Stephen Spencer, managing director at Houlihan Lokey and advisor to Prepa bondholders, called the proposal "the best possible outcome for all stakeholders," and urged the utility to agree to the new debt structure.
The beleaguered power utility rejected the bondholders' debt plan on Thursday, but still has until Sept. 15 to reach a new agreement with creditors.
Q: What institutional investors have the most exposure to Puerto Rico debt?
A: Morningstar data show that about 52 percent of U.S. municipal bond funds hold credit tied to Puerto Rico, with the average exposure within those funds totaling about 3 percent.
Two U.S. bond funds, OppenheimerFunds and Franklin Templeton Investments, account for more than 66 percent of the roughly $9.9 billion in total market value exposure.
Dozens of hedge funds also have assets tied up in Puerto Rico's debt, including big players like Paulson & Co., BlueMountain Capital and Perry Capital.
Q: What is Puerto Rico doing to try to fix its debt crisis?
A: On July 8, Citigroup, which is working as a broker-dealer for the island, hosted a meeting between Puerto Rico officials and its creditors. Jim Millstein, founder of Millstein & Co. and advisor to Puerto Rico, said he hoped that the meeting would be the first in a series of "constructive discussion with the commonwealth and investors to put it on trajectory of economic growth." Millstein also told creditors that each debt obligation would be looked at separately in the restructuring process to determine if an adjustment to the current structure would need to be made.