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Puerto Rico gets help in Congress as debt deadline looms

Tomas Colon reads a newspaper with a headline that reads, 'more sacrifices,' a day after the speech Puerto Rican Governor Alejandro Garcia Padilla gave regarding the government's $72 billion debt on June 30, 2015, in San Juan, Puerto Rico.
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Tomas Colon reads a newspaper with a headline that reads, 'more sacrifices,' a day after the speech Puerto Rican Governor Alejandro Garcia Padilla gave regarding the government's $72 billion debt on June 30, 2015, in San Juan, Puerto Rico.

The bill to help Puerto Rico with its $70 billion debt crisis moves to the Senate after the U.S. House of Representatives passed the bill Thursday with bipartisan support.

The 297-127 vote amounted to clearing a large legislative hurdle as the cash-strapped island faces a July 1 deadline for a massive debt payment.

However, even if the Puerto Rico Oversight, Management, and Economic Stability Act is able to move quickly through the Senate and is signed into law by President Barack Obama before the debt due date, it will unlikely alter the course of the debt obligations due that day.

Puerto Rico owes nearly $2 billion on various securities next month, including about $800 million due on its general obligation bonds, securities backed by the full faith and credit of the commonwealth's constitution, Puerto Rico governor Alejandro Garcia Padilla has stated the commonwealth does not have the funds to pay the debt.

Bondholders, analysts, investors and insurers of Puerto Rico's paper are all closely eyeing how the its government will handle the July debt deadline. A missed or partial payment on GO bonds would be the first default on a security that carries the highest priority of repayment under Puerto Rico's constitution.

"I think at this point it will be very difficult to avoid default," said Nader Tavakoli, president and CEO of monoline insurer Ambac, at a Debtwire event Tuesday in Manhattan. Tavakoli also noted that by Ambac's calculations, Puerto Rico should be able to pay all interest due on the GOs on July 1, but that the principal portion due was in question.

The three largest insurers of Puerto Rico's bonds — Assured Guaranty, Ambac and National, a wholly owned subsidiary of MBIA — collectively have more than $800 million in exposure to the total $1.9 billion due July 1. The predominant exposure for two of the insurers is to bonds that are GO guaranteed — with Assured Guaranty and MBIA backing $196.5 million and $173 million, respectively.

Melba Acosta, the head of the Government Development Bank, which acts as the island's primary fiscal agent, addressed the July GO payment at the Debtwire event when questioned on the whereabouts of revenue that had been previously clawed back. Padilla had authorized the clawback late last year, a move in which revenue streams meant for certain tax-supported bonds were diverted to pay for debt that carries a constitutional guarantee.

"My understanding is that [the clawback revenue] will go to pay some sort of amount on the debt payment in July," Acosta said during a panel conversation on Tuesday.

However, Acosta noted that the revenues from the clawbacks are kept by Puerto Rico's Treasury Department, leaving the ultimate decision for how the funds are deployed in the hands of the Treasury secretary.

Other large payments due July 1 that are backed by the monolines include Puerto Rico Electric Power Authority, where MBIA and Assured Guaranty have exposure of $139 million and $35 million, respectively. That is in addition to Ambac's $41.7 million in exposure to PR's rum tax bonds and $38.6 million on the Public Building GO guaranteed securities.

Debt experts are cautious on how the situation will unfold for the insurers.

Edward Groshans, an analyst at Height Securities that focuses on the island's monoline insurers, believes that although the stability legislation passed Thursday should be a benefit for the insurers in the long-term, he warns that initial volatility is likely while an oversight board is being setup.

"During this time period, the monolines will likely have to make payments to bondholders on a number of Puerto Rico bonds, and these payments could be significant and broad based," Groshans wrote in a recent research note.

Groshans is anticipating a six- to nine-month period before the oversight board is operational and can begin asserting control over the island's finances. That would result in all three of the monolines having to make payments on the bonds they insure through early 2017.

Correction: An earlier version misstated the exposure Assured Guaranty has to Puerto Rico debt.