Bankruptcy policies that U.S. lawmakers are considering for Puerto Rico could have a chilling effect on the broader municipal bond market, according to a major investor in the commonwealth.
"If you grant [Puerto Rico] unique protections, or unique ability to restructure its debt not afforded to the states, that sets an insidious beginning for undermining confidence in the willing to pay across the municipal marketplace," said Hector Negroni, the co-CEO and CIO of New York-based Fundamental Credit Opportunities.
Despite indications to the contrary, senior Puerto Rico officials of the commonwealth are not actively negotiating with many creditor groups, he added.
Granting Puerto Rico what has been referred to as "Super Chapter 9" — lumping all 18 bond issues together under the same terms — could lead to fiscally struggling U.S. states trying to pursue a similar extraordinary restructuring option for their own outstanding debts, said Negroni, who holds bonds issued by Puerto Rico and is the former head of municipal trading at Goldman Sachs.
He believes the political move would be dangerous because it could undermine investor confidence in the willingness for bond issuers to pay holders of its debt.
"It creates a lack of confidence, increases spreads, volatility and makes the cost of financing necessary infrastructure across the nearly $4 trillion marketplace much higher and less certain," Negroni said.
Negroni also said that various creditor groups are "ready and anxious" to start talks with the commonwealth about restructuring the approximately $70 billion in outstanding debt, but that thus far senior officials have "frankly not been very earnest in their availability and their willingness to connect" with the bondholders.