Politics Makes Debt Default in Puerto Rico Almost Inevitable

By Amey Stone

Barron'sThe last major headline news out of Puerto Rico was on October 22 when the Obama Administration proposed a comprehensive plan for solving the commonwealth’s financial crisis. The proposal included allowing Puerto Rico to declare a form of bankruptcy and created a financial oversight board.

There are a lot of problems with the plan, especially as some bondholders received it. But perhaps the biggest one is politics — both on the mainland and in Puerto Rico.

Triet Nguyen of New Oak Asset Management sees little likelihood of any major resolution coming to fruition in the next year given the bleak political landscape that includes a fractious U.S. election process and the chance that Puerto Rico’s Governor Alejandro García Padilla may not even run again.

Nguyen writes in a recent article:

At the end of the day, one cannot help but reach the inescapable conclusion. First, the probability of a default on GO-backed debt is quite high, if not in December then in January (unless the Commonwealth decides to not call it a default, given its proven tendency to play semantic games). Secondly, it’s likely no real long-term solution will be adopted before November of 2016.

Meantime, massive debt payments are looming. Puerto Rico owes a $355 million Government Development Bank notes payment on December 1st and a $331.6 million general obligation debt payment on January 1. Nguyen adds:

Even if it can muster enough short-term liquidity to get through this year, the island will run into a “huge wall of payments” on July 1, 2016 when $780 million in GO debt service comes due.

Puerto Rico has said it will run out of cash in November.

Puerto Rico’s 8% bonds maturing in 2035 reached a low of 70.35 on October 22 and traded on very low volume at 73 on October 30.

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