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PUERTO RICO REPORT

Wednesday, Oct 04, 2017

Seema Balwada, CFA / October 4,2017

President Trump Cannot “Wipeout” Puerto Rico Debt…

Governor Rosselló Dismisses Trump’s Remarks…

Debt Restructuring Process Currently Taking Place Will Continue…

President Trump’s statement that Puerto Rico’s debt should be “wiped-out” goes against all laws in place governing contracts. There are numerous questions about his purpose, the legality and the feasibility of his comments. Beyond giv-ing his verbal support for Puerto Rico, Trump does not have the ability to help Puerto Rico by wiping-out the Island’s debt. His remarks should not be taken literally but must be taken seriously. There is no feasible method for Trump to “wipeout” Puerto Rico’s debt. His bully pulpit remarks were likely meant to influence the outcome of debt negotiations by creating bondholder negative headlines. It appears Trump’s comments were meant to shift debt negotiation leverage to Puerto Rico and weaken bondholder resolve during the ongoing debt restructuring negotiations. His remarks about Wall Street and Goldman Sachs seem to be an attempt to tap into the populist opinion of Wall Street that helped him get elected. One must also consider the fact that Trump has a history of making provocative comments before having complete details. Administration officials have already begun to walk his comments back.

Municipal bond debt is primarily governed by state law and the U.S. Constitution, in Puerto Rico’s case territorial law. President Trump cannot wipeout municipal bond debt. Therefore, Trump’s “wipeout” comment cannot be taken literally. If taken verbatim Trump’s comments, made to intimidate bondholders, are unlike anything the muni market has ever heard. The President’s budget Chief Mick Mulvaney said he believes the President meant, Puerto Rico is going to have to figure out a way to solve its debt problems.

Trump gave no details on how he would wipeout Puerto Rico’s municipal bond debt outside of bankruptcy court. Debt backed by the Island’s Constitution and debt that has a statutory lien just can’t be cancelled. If municipal bond debt could be “wipedout” investor faith in the almost $4 trillion municipal bond market would be seriously damaged. As intended the President’s remarks are having a negative effect on all Puerto Rico municipal bond pricing. If Puerto Rico debt is resolved unfairly, municipal borrowers would almost certainly see their borrowing cost rise substantially to account for added political risk costing taxpayers dearly.

The process through which Puerto Rico’s debt will be restructured is outlined in the 2016 law enacted by Congress
“PROMESA”. The debt restructuring is being overseen by Judge Laura Swain and a panel of Federal Judges. It is very doubtful Trump’s comments will sway Judge Swain. Supreme Court Chief Justice Roberts appointed Judge Swain based on her history of respect for the law and her reputation as being fair. If consensual agreements are not obtained recovery values on Puerto Rico bonds will be determined by Judge Swain not President Trump. The well-respected judge has stated she will take into consideration the massive federal rescue package Puerto Rico is expecting.

Unfortunately politicians make statements for a variety of political reasons. In some cases what they really mean needs to be interpreted and their true intentions may take time to be realized. In 1975 during the NYC financial crisis, the city asked President Ford for help. The front page of the Daily News read, Ford to City: “Drop Dead”. Shortly after the head-line appeared, Ford signed legislation that helped NYC with its finances.

Major Puerto Rico bondholders Goldman Sachs, Oppenheimer Funds, Franklin Templeton Funds, Mass Mutual, hedge funds and bond insurers will continue to spend millions to assure Constitutional law is enforced and to protect bondholder’s rights in Court while continuing to negotiate for a fair settlement.

The prices of Puerto Rico bonds initially dropped to record lows on the uncertainty of both Trump’s statement and the unknown amount of federal aid Puerto Rico will receive. Bond prices recouped about half the losses after market participants realized the President cannot wipeout Puerto Rico debt, Governor Rosselló dismissed Trump’s remarks and Senator Schumer said, “Puerto Rico needs a fair solution to deal with its debt.”

Trump and Puerto Rico would like out of court settlements. His off the rails comments could hasten consensual agreements, which may have been his intent.

If you have any questions or desire updated information contact your GMS Account Executive. Information taken from sources deemed reliable. This update does not purport to include all available information

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