Saturday, July 5, 2014

Barron's: "Puerto Rico may have miscalculated when it enacted legislation recently..." - Puerto Rico: The New Detroit | Former ‘Commonwealth’ Party President Urges His Party to Agree to a Statehood: Yes or No Plebiscite

Puerto Rico: The New Detroit
Saturday July 5th, 2014 at 9:39 AM

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July 4, 2014 2:32 a.m. ET
Puerto Rico may have miscalculated when it enacted legislation recently to allow the restructuring of some $20 billion of debt issued by various public corporations, notably the Puerto Rico Electric Power Authority (Prepa), Puerto Rico Highways and Transportation Authority (Prhta), and the Puerto Rico Aqueduct & Sewer Authority (Prasa).
The goal was to cut loose those financially ailing entities from direct government support and thus preserve needed liquidity for the central government. That in turn was supposed to bolster both Puerto Rico's general-obligation bonds and Cofina, an issuer of about $15 billion of debt backed by sales-tax receipts that has been long viewed as the top credit on the island.
However, Puerto Rico's action has backfired with investors who reason that if the commonwealth is willing to change laws to undermine one group of bondholders, it may be just a matter of time before the economically depressed island seeks to restructure other debt.
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As we warned last year, Puerto Rico is moving to restructure some debt, slamming municipal-bond investors as well as bond insurers.
In a major move that surprised the markets, Moody's Investors Service on Tuesday sharply reduced credit ratings on all major Puerto Rico debt issues, which now have across-the-board junk ratings. "By providing for defaults by certain issuers that the central government has long supported, Puerto Rico's new law marks the end of the commonwealth's long history of taking actions needed to support its debt," Moody's wrote. The GOs were dropped to B2 from Ba2, and Cofina's senior debt was cut to Ba3 from Baa1; the latter is an investment-grade rating.
The benchmark 8% Puerto Rico bond due in 2035 fell about 5%, to 85 cents on the dollar, and now yields 9.81%. That $3.5 billion deal was sold with much fanfare in March at a price of about 93. Prepa's long-term debt, which was already depressed in anticipation of a potential default, fell to 40 cents on the dollar from 45 cents. Cofina debt was hard hit, with a 6% issue due in 2041 dropped to 67 cents on the dollar from 82 cents and its yield lifted to 9.4%.
Less than a year ago, Barron's warned in a cover story that Puerto Rico was in danger because of "weak economy, persistent budget deficits, and onerous debt" ("Troubling Winds," Aug. 26, 2013). Our view was that a Puerto Rico debt restructuring was a distinct possibility, despite an insistence to the contrary by the government. Puerto Rico would likely impose only so much financial pain on its relatively poor residents, we reasoned, to benefit the affluent group of mainlanders who own its debt.
The bull case now is that Puerto Rico is committed to protecting the GO debt and Cofina, and that yields, which are tax free on most bonds, are enough to compensate for the risk. A former deadbeat country like Ecuador has issued debt at 7%, and Argentine bonds yield 9%.
But Puerto Rico bond yields still may not be enough to compensate for the risks. The likely restructuring proposal that Puerto Rico is expected to put forth for Prepa and the other government corporations could be punitive. And the new law gives bondholders few rights and essentially strips them of their lien on essential-service revenues. Investors are also unhappy that Puerto Rico is treating its own loans to those public corporations through the Government Development Bank, a commonwealth financing arm, as untouchable.
Puerto Rico has burned its two largest mutual-fund investors, OppenheimerRochester and Franklin, which are suing the commonwealth, arguing the new law is unconstitutional. "The government is effectively saying it is no longer willing to pay back loans used to build Puerto Rico's essential transportation, power, and water and sewer infrastructure, in full or on time," wrote analysts at Nuveen Asset Management last week. "Barring a significant and lasting revival in Puerto Rico's economic trajectory, we believe the commonwealth will continue to struggle with budget deficits and may ultimately enact similar restructuring measures for its general-obligation debt."
The Puerto Rico mess does appear to demonstrate the value of muni-bond insurance because insured debt was trading at far better levels than uninsured bonds. The share price of two leading insurers, Assured Guaranty AGO -2.60% Assured Guaranty Ltd. U.S.: NYSE $23.20 -0.62 -2.60%July 3, 2014 1:00 pm Volume (Delayed 15m) : 3.58M AFTER HOURS $24.00 +0.80 +3.45% July 3, 2014 4:00 pm Volume (Delayed 15m): 29,581 P/E Ratio 4.31 Market Cap $4.17 Billion Dividend Yield1.90% Rev. per Employee $3,496,930 More quote details and news » AGO in  Your Value Your Change Short position (ticker: AGO) and MBIA MBI -4.55% MBIA Inc. U.S.: NYSE $10.29 -0.49 -4.55%July 3, 2014 1:01 pm Volume (Delayed 15m) : 5.48M AFTER HOURS $10.27 -0.02 -0.20% July 3, 2014 3:05 pm Volume (Delayed 15m): 12,046 P/E Ratio 5.78 Market Cap $2.01 Billion Dividend YieldN/A Rev. per Employee N/A More quote details and news » MBI in  Your Value Your Change Short position (MBI), did decline last week, but the companies should be able to weather any Puerto Rico defaults. Assured Guaranty fell 6%, to $23.20, and MBIA was down 10% to $10.29. Investors are worried that the two companies might be forced to raise capital to offset any Puerto Rican losses.
Assured Guaranty has $5.3 billion of exposure to Puerto Rico, including $2.4 billion to the three main corporations likely targeted for debt restructuring, according to its March 10-Q report. MBIA has $4.8 billion of Puerto Rico exposure, including about $2.5 billion to the three corporations.
-- Andrew Bary
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mikenova shared this story . July 5, 2014 Amid the overall alarm over the crises in the Electric Power Authority (PREPA), keep the perspective of what is still the future of the industry and the overall development of Puerto Rico: the cr...
» Former ‘Commonwealth’ Party President Argues for Plebiscite on Statehood
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A recent president of the ‘Commonwealth’ party used the holiday celebrating the independence of the United States Friday to reiterate his call for a plebiscite... Read More
» Former ‘Commonwealth’ Party President Urges His Party to Agree to a Statehood: Yes or No Plebiscite
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Thursday, July 3, 2014

Puerto Rico’s Indebted Power Utility Adds to Island’s Problems - NYT

Puerto Rico’s Indebted Power Utility Adds to Island’s Problems

By 
 
A Puerto Rico Electric Power Authority worker. Dennis M. Rivera-Pichardo for The New York Times
Puerto Rico’s electrical utility is running out of money and time to negotiate a deal with its lenders, part of a broad reckoning for an island that relies on Wall Street to finance some of its most basic functions.
The Puerto Rico Electric Power Authority must repay $146 million toCitigroup over the next two months for a credit line used to buy oil to generate electricity. It is also uncertain whether the authority will be able to renew a $550 million credit line from Scotiabank for fuel purchases, people briefed on the matter said.
With the power authority’s lenders growing increasingly skittish, analysts and investors expect the utility will be forced to restructure its debts to avoid crippling power shortages for Puerto Rico’s 3.6 million residents.
The likelihood of a restructuring increased after Gov. Alejandro Garcia Padilla hurriedly signed a new law into effect over the weekend allowing public corporations like the power authority to seek protection similar to what bankruptcy provides. Representatives for Citigroup and Scotiabank declined to comment.
The troubles at the state-owned power company epitomize the broader issues facing Puerto Rico, an island buffeted by 13.8 percent unemployment and an exodus of residents. The power authority — known by its acronym Prepa — has borrowed billions from Wall Street banks and municipal bond investors to keep its operations afloat. In recent years, the cash squeeze has become so severe that the power authority has had to borrow just so it could pay existing debt.
Like states, neither Puerto Rico nor its public corporations are allowed to file for bankruptcy protection, leaving them little means to reduce their obligations in the case of financial stress.
But the Recovery Act, enacted over the weekend and devised with help from the law firms Cleary Gottlieb Steen & Hamilton and Proskauer, would allow public corporations to revamp debt and renegotiate labor contracts. It does not apply to general obligation bonds issued by the commonwealth.
While Puerto Rico officials insist the government’s debt remains sacrosanct, Moody’s Investors Service downgraded the commonwealth’s general obligation rating further into junk status on Tuesday, saying the Recovery Act “marks the end of the commonwealth’s long history of taking actions needed to support its debt. It signals a depleted capacity for revenue increases and austerity measures, and a new preference for shifting fiscal pressures to creditors.”
The downgrade follows a lawsuit filed over the weekend against the Puerto Rico government by investment funds, managed by Franklin Templeton Investments and OppenheimerFunds, arguing that only Congress can create bankruptcy laws.
But even if the authority can use a restructuring to shed some debt — including $9.3 billion in municipal bonds — it still faces fundamental problems with no easy solutions.
Unlike most of the United States, which uses either coal or natural gas, Puerto Rico relies largely on oil to generate electricity, which has driven up rates and compounded a recession that has lasted nearly eight years. Rates are twice as high in Puerto Rico as on the mainland, straining big power consumers like hotels and manufacturers and driving small retailers out of business.
“It is not the only thing that is holding back the economy, but it is an important factor,” said Sergio M. Marxuach, policy director at the Center for a New Economy, a research group in San Juan.
The utility, which relies on imported oil for fuel, charges its customers rates twice that on the mainland. Dennis M. Rivera-Pichardo for The New York Times
Raising electric rates on consumers to increase revenue and help pay down debt might persuade banks and bondholders to extend the authority more credit, but it could prove politically risky for Governor Padilla.
Over the long term, the authority wants to convert more of its oil-powered plants to less expensive natural gas, but a plan to extend a pipeline from a natural gas source on the island’s southern coast to its northern coast has met stiff political and environmental pushback.
In the meantime, the authority has been retrofitting its oil-burning plants, some of which are decades old.
Puerto Rico’s power problems are a vicious cycle. High energy costs are contributing to the island’s economic downturn, which is driving away residents. The declining population means a reduction in energy consumption, which is increasing financial pressure on Prepa and hindering the agency’s modernization efforts.
But the more immediate concern is coming up with money to pay for oil shipments from its main supplier, the Brazilian energy giantPetrobras.
“They have no spare liquidity going forward,” a Moody’s analyst, Richard E. Donner, said in an interview.
The Government Development Bank for Puerto Rico — the island’s powerful fiscal agent — has traditionally lent money to struggling corporations like Prepa. But finance officials say they are trying to wean public agencies from the central government’s backstop.
“Neither the commonwealth nor the G.D.B. is in the position to subsidize or bail out public corporations,” the development bank said in a statement. “They need to become self-sufficient.”
Bond investors have been amply warned of the risks of lending to Puerto Rico’s power authority, which include millions in lost revenue annually from people stealing electricity.
“People bought the bonds knowing full well the problems and they were compensated adequately,” said Mr. Marxuach, the policy researcher.
Many of the current bondholders include hedge funds that have bought the debt as its prices have fallen. Since the Recovery Act was announced last week, some Prepa bonds that are due over the next four years have lost as much as 40 percent of their value, according to the lawsuit filed by the investment funds in the United States District Court for the District of Puerto Rico in San Juan.
One possible outcome of a restructuring is breaking up Prepa and selling its assets to private companies. This prospect has set off a scramble among alternative energy companies looking for business.
Howard Hager, chief executive of Renewable Energy Design, a Massachusetts-based firm, returned from Puerto Rico last week, where he had been seeking to sell energy-efficient lighting and propane-powered generators. Mr. Hager has also proposed to Puerto Rico officials that they consider buying fuel made from wood pellets as a cheaper alternative to oil. “Prepa can save itself,” Mr. Hager said. “But it has to start doing things that are good for the people.”

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LMTC

 PR Yesterday
It's time to let the people know a little bit mre about the situation of PREPA... Being a Public Corporation, Lawmakers have inmense power over the corporation. Public Agencies like The Education Department, The Treasury Department and all Municipalities on the Island Owe hundreds of millions os Dollars to PREPA... Add to this Hotels,Hospitals, TV channels ( yes, Univision ) and many factories under the protection of Lawmakers, also owe PREPA Millions. By law PREPA is Required to Give PRASA 40 Million a yeay on subsidies Housing project's families pay pay a fixed amount of $40.00 monthly no matter what they consume. Salaries are a mere 3% of the cost of power production and transmission. Fancy manipulation of numbers by Lawmakers is the real reason of this mess.
     

CHEEKOS

 SOUTH FLORIDA Yesterday
Its interesting as to how many Municipal Bond Investors have bought Puerto Rican State and Local Government Bonds. They were sold to them on the basis of the "triple tax-exemption"--free from the investors' own City and State, as well as Federal Income Tax.

Unfortunately, in their haste to take advantage of such a deal, they did not ask and were not advised of the basket case that Puerto Rico's finances are in. High unemployment and many, many Residents work for some form of government entity or another.

Most brokers and Financial Advisors don't truly understand the bond markets and, as we saw five years ago, Muni Bond Insurance can turn-out to be next to worthless. Remember that Securities Salespeople are not Fiduciaries: they are only required to have their Firm's and their own best interest at heart.

http://thetruthoncommonsense.com
     

comtut

 Puerto Rico Yesterday
While this article makes many good points, one that was overlooked is the failure of many of our municipios (towns) to pay not only their electric bills but their water bills as well, as note by another poster. PREPA and PRASA (water authority) are owed millions of dollars for past due bills and there has been no effort on the part of the local officials to do anything about this.
     

charles

 philadelphia Yesterday
"Adds" to the Islands Problems is a true understatement.

The electric utility has driven many other businesses (ranging from restaurants, hotels, retailers to name a few) into bankruptcy due to the astronomical rates it charges. There is an irony here --- the power authority drove many private businesses out-of-business, now they have contracted the bankruptcy flu.

The use of oil is not the only reason why the utility's rates are so high --- many households have what is known as a "pijo" --- a bypass of the electric meter so that they power use is not measured. You can immediately recognizes these houses based on their air conditioning use. Yet, the electric authority does little or nothing to stop this theft. Second, many of the government agencies do not pay their electric bills and service continues.

Hence, the real cost of power in Puerto Rico is inflated by 1) use of oil; 2) power theft; 3) government agencies that do not pay for service. Lets also remember that all the oil that is used must be imported by US Flag carriers under the Jones Act. How many oil tankers have US Flags in the world? Last I heard there were 4 such tankers.
     

vaporland

 Denver, Colorado, USA Yesterday
A tropical island with near-constant sunshine and breezes that would benefit from virtually free solar and wind power has taken advantage of neither in the midst of a financial and energy crisis?

Sounds more like a crisis of common sense. Apparently the US Virgin Islands is going throng the same thing. Must be the tropical sunshine, or too much rum & coke...
     

ERS

 San Juan, PR 12 hours ago
The southern portion of the island near Ponce has extensive wind farms with close to 100 turbines. I have not seen much solar, though.
     

LMTC

 PR 12 hours ago
I would love to agree... but that is not absolutely real... constant beeze cannot be counted on because they only occur in open Ocean. Constant sunlight neither... only in the morning in all but the south part of the Island.... Me as many others have created in our spare time many solutions to this crisis... but to no aval... the Suits are convinced their solutions are the only good ones. We, in our spare time have created effective open source software solutions, designed highly efficient solar collectors that could lower the cost inmensely.. but what goood does it do if nobody listens????
     
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SRAM

 NY Yesterday
PREPA has three problems, which I rank in order of importance. 1. Oil is the main input for generating power. Oil is relatively more expensive than natural gas or coal. 2. PREPA is an inefficient company with too high a cost structure. The largest non-fuel cost line item is labor, which is backed by a powerful union that has successfully ensured it receives ever-greater wages and benefits. Relative to utilities in the U.S., PREPA has highest number of employees, offices, administrators and supervisors in relation to its number of electric power clients and megawatts served. 3. PREPA has too much debt.

By restructuring the debt, PREPA is setting the table to try to extract concessions from labor. Eliminating the debt would only shave off only $0.03/kWh from a retail customer's utility bill. (PREPA retail customers pay on average $0.27/kWh vs. a U.S. average of ~$0.13/kWh.) But right sizing labor and labor benefits would reduce power cost by more than twice as much.
     

Mark Shapiro

 Chicago Yesterday
Prepa painted itself into the corner described here mainly by burning oil to generate electricity, (like many small islands).

This is expensive and unsustainable, as the article makes clear: electric rates are high, hurting the economy, but not high enough to cover the cost of the oil.

The solutions are clear also: efficiency of course, and renewables like wind and solar, which are actually more predictable and reliable in the tropics.

Getting there requires leadership -- it is not trivial. And bankruptcy is needed to cut the gordian knot and allow a fresh start -- precisely what bankruptcy law was invented for.
     

MoralMage

 Indianapolis, IN Yesterday
Bankruptcy re-organization with a specially appointed Court Master, one hopes. From where, I have no idea.
     
A version of this article appears in print on 07/02/2014, on page B8 of the NewYork edition with the headline: Puerto Rico’s Indebted Power Utility Adds to Island’s Problems.
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