New Puerto Rico bill unveiled as some investors smell opportunity


The latest version of a bill to help aid the fiscally strapped island of Puerto Rico was unveiled late on Wednesday by House Republicans after a month of negotiations.

Top U.S. lawmakers expressing their support for the bill Wednesday.

"We have a bipartisan agreement [on the bill]….that does contain a restructuring that can work," US House of Representatives Democratic leader Nancy Pelosi told reporters at her weekly press briefing. "It calls for the oversight board to treat everyone equally and fairly and by that I mean pensioners and the rest" of the bondholders, she said.

Puerto Rico, which recently registered its largest default to date on May 2 when it failed to make a $367 million payment on bonds issued by the Government Development Bank, is struggling with a massive debt load of $70 billion in bonded indebtedness and an additional $43 billion asset deficit in the island's pension fund.

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Pelosi also noted that despite the legislation not being a bill that she would have written, the White House, House Speaker Paul Ryan's office, and her office all participated in coming to an agreement on a bill that they can ultimately support.

Some experts are more critical of the bill in its current form.

"The bill remains more aspirational that actionable," said Daniel Hanson, an analyst at Height Securities. "Without clearly specified legal protections or priorities, the legislation is demanding a lot of trust from creditors regarding the composition of the federal control board and its ability to effect operational change within the budget," Hanson wrote in a note issued Thursday.

Despite the uncertainty surrounding the whether the legislation will be able to be passed before the July deadline, some money managers see opportunity in the depreciated bond prices, albeit with some caveats.

"We've been talking about adding to the position," said Mark Taylor, a portfolio manager and head of municipal research at Alpine Funds, about increasing the Alpine High Yield Managed Duration Municipal Fund's exposure to Puerto Rico. The fund currently has about 5 percent allocated to select Puerto Rican paper.

Taylor, who manages more than $1 billion in fixed income, sees value in bonds within a five-year maturity and that are insured by either Assured Guaranty or National Public Finance Guarantee, a wholly owned subsidiary of MBIA. His thesis is based on the anticipation of Puerto Rico registering a "full blown default" on its debt, but feels that both AGO and MBI have strong capital structures that "can handle a full, complete, default for the next five years and still make debt service payments to bondholders".

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A key issue during closed-door negotiations about the bill focused on the composition and power of the oversight board.

The board will consist of seven members appointed by the U.S. president who have been confirmed by the Senate or from lists prepared by congressional leadership. The board members will have far-reaching power over Puerto Rico's finances and access to restructuring portions of its $70 billion debt load.

Under the bill, there are several requirements for an entity to fulfill before being permitted to restructure its debt, including good-faith efforts to reach a consensual restructuring with its creditors and having a fiscal plan in place. Five of the seven oversight board members will need to certify that all of the required measures have been met before allowing the entity to restructure its debt.

The board will also have authority over future debt issuance, with the government of Puerto Rico needing prior approval from the board before attempting to tap capital markets.

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The Oversight Board will remain in place until Puerto Rico has shown for four consecutive years that it has developed its budgets in accordance with accounting standards, has achieved balanced budgets and is able to access capital markets in the short- and long-term at reasonable rates.

The legislation will now need to be marked up and voted out of the House committee on natural resources in order for it to be sent to the House floor for a full vote.

Congressional leaders hope to get the legislation passed and signed by the president before the island faces its next massive debt payment deadline on July 1 when approximately $2 billion is due, including nearly $800 million on General Obligation bonds that carry a constitutional guarantee.