what is puerto rico’s problem? · (cofina) increases about 3% per year ... working group for the...
TRANSCRIPT
What is Puerto Rico’s Problem?
CFAP Downtown Luncheon
Wednesday, March 23, 2016
Agenda
• Panel Discussion (12:30 – 1:15) – Speaker introductions
– An overview of Puerto Rico’s problem
– Why investors should care about Puerto Rico
– Upcoming dates & events related to Puerto Rico
– How the problem might be solved
• Audience Q&A (1:15 – 1:30)
• Networking (1:30 – 1:45)
David Hitchcock
• Standard & Poor’s, Senior Director, State Ratings Group
• EF Hutton, Municipal Bond Research • Municipal Analysts Group of New York,
Past Chairman • National Federation of Municipal
Analysts, Past Board Member and Recipient of Meritorious Service Award
• Smith’s Research and Ratings Review All-Star Municipal Analyst, multiple years
• Williams College, BA in Physics
John Mousseau, CFA
• Cumberland Advisors, Municipal Bond PM, Executive VP, Director of Fixed Income
• Lord Abbett, Director of Municipal Bond Investments • Lehman Brothers • EF Hutton • Member of several industry groups including PCBE,
NFMA, NABE, WAMM, NEC • NYSSA, Past Chair of the Municipal Bond Buyers
Conference, Member of High Net Worth Investors Committee
• Instructor, New York Institute of Finance & Bond Market Association
• Brown University, MA Economics • Georgetown University, BA in Economics
Alan Schankel
• Janney Mongtomery Scott, Managing Director, Municipal Bond Strategist
• FINRA, Fixed Income Committee & Arbitrator for Dispute Resolution
• The Bond Club of Philadelphia, Past President
• Municipal Bond Club of Philadelphia, Past President
• Wharton School of the University of Pennylvania
• Postgraduate work at University of Pennslyvania, Temple University & Rutgers
• Increasing Debt Service Schedule– sales tax bond debt service (COFINA) increases about 3% per year
• Operating deficits-- Still occurring, although lowered. There has been political opposition to recent sharp tax hikes, imposition of a VAT, and to potential spending cuts
• Stagnant Economic Performance-- in part the result of the final phase out in 2006 of federal tax breaks for manufacturers
6
Puerto Rico Key Pressure Points
Source: Standard and Poor’s Puerto Rico rationale published March 22, 2016
Overview
Overview
Public Financing Corp.: ‘D’ in default. Secured only by general fund appropriations.
PRIFA Rum tax secured bonds: ‘D’ in default. These bonds have adequate pledged revenue coverage, but Puerto Rico has diverted pledged revenue to payment of GO bonds
Highways and Transportation Authority: ‘CC/Negative’ These bonds have adequate pledged revenue coverage, but Puerto Rico is diverting gas and petroleum tax revenue to GO debt service, although not toll road revenue
Convention Center District hotel tax backed bonds: ‘CC/Negative’ These bonds have adequate pledged revenue coverage, but Puerto Rico is diverting pledged revenue to pay GO debt service.
9
Selected Non-GO ratings
Source: Standard and Poor’s Puerto Rico rationale published March 22, 2016
GO: 28% haircut
COFINA: 51% haircut
Highways Authority, CCD, PFC, GDB, ‘everything else’ combined: 61% haircut
10
Puerto Rico Restructuring Proposal
Source: Working Group for the Fiscal and Economic Recovery of Puerto Rico– Puerto’s Fiscal and Economic Crisis presentation, March 1, 2016; S&P calculations
11
Puerto Rico Projected Cash Flow (Jan. 18 projection)
Source: Working Group for the Fiscal and Economic Recovery of Puerto Rico-- Puerto Rico Fiscal and Economic Growth Plan updated presentation, Jan. 18, 2016
Overview
Source: Bureau of Labor Statistics
Disclaimer: Puerto Rico and Greece are rated using different criteria
• Puerto Rico (‘CC/Negative’)– rated under our State Rating Methodology published Jan. 3, 2011, and our ‘CC’ Criteria published Oct. 1, 2012
• Greece (‘B-/Stable’)– rated under our Sovereign Rating Methodology published Dec. 23, 2014
13
Puerto Rico and Greece
Points of Comparison
Puerto Rico Greece
Real GDP Annual Growth
2010-2014
(3.6%), (1.8%), +0.7%, (0.2%), (0.9%)
respectively
(5.5%), (9.1%), (7.3%), (3.2%),
+0.7% respectively
Debt/ GDP 44.7% (2014 tax-backed debt
supported by the Commonwealth-
does not include underlying municipal
debt or federal debt– including all
underlying municipal debt and public
authorities it would be 68.9%)
171.1% (2014 Net general
government debt/GDP)
Current GDP Per Capita $28,900 (2014 preliminary) $21,200 (2014)
Impact of a Debt Default Puerto Rico bonds were widely sold
throughout the U.S. municipal market
Potentially lighter impact on
eurozone government bonds
14
Puerto Rico and Greece
Sources: Puerto Rico Planning Board, Puerto Rico Nov. 6, 2015 disclosure statement, Standard and Poor’s Puerto Rico rationale published March 22, 2016, Standard and Poor’s Greece
rationale published Jan. 22, 2016
Points of Comparison
Puerto Rico Greece
Sovereign Status A U.S. territory– only has non-
voting representation in
Congress
Full member of the euro area
Labor Mobility Full mobility within the U.S. Full mobility within the EU
Control of Its Own Currency No control Representation at ECB, but Greek
economy not well synchronized with
euro area as a whole
Fiscal Transfers High level of fiscal transfers from
the U.S. government (about 24%
of island personal income)–
primarily social security, but also
Medicare, Medicaid, food
stamps, and veteran’s benefits
Customs transfers, which are
relatively minor
15
Puerto Rico and Greece
Sources: Puerto Rico Planning Board, Puerto Rico Nov. 6, 2015 disclosure statement, Standard and Poor’s Puerto Rico rationale published March 22, 2016, Standard and Poor’s Greece
rationale published Jan. 22, 2016
©Copyright 2016 Cumberland Advisors®. Further distribution prohibited without prior permission. 16
PR: Uninsured vs. Insured
3
4
5
6
7
8
9
10
Puerto Rico Uninsured vs Insured
Uninsured Puerto Rico Insured Puerto Rico
5.00% Due 7/1/41
Call: 7/1/22 Dated: 4/3/2012
5.00% Due 7/1/35
Call: 7/1/22 Dated: 4/3/2012
Source: Bloomberg
©Copyright 2016 Cumberland Advisors®. Further distribution prohibited without prior permission. 17
PR GO: 8% due 2035
March 11, 2014:
Puerto Rico issues $3.5 bn
of general obligation debt,
drawing hedge funds
interest
August 1, 2015:
Partial default of debt
owed by the Public
Finance Corp. (PFC)
January 1, 2016:
Commonwealth defaults
on Puerto Rico
Infrastructure Finance
Authority (PRIFA) debt
February 16, 2016:
Governor signs the Puerto
Rico Electric Power
Authority (PREPA)
Revitalization Act
8
9
10
11
12
13
The Bellwether
Source: Bloomberg
Why care?
4,832
1,648
994
367
289
274 230 217
171
169
60,809
Oppenheimer
Franklin Advisers
Goldman
Franklin Resources
Nuveen
Lord Abbett
Eaton Vance
Capital Research & Management
Wells Fargo
Invesco
Other
Bondholders as of July 1, 2015
Source: Bloomberg 9/15
Why Care?
• In 1945, there was less than $20B of municipal debt outstanding
• In 1960, there was $66B
• In 1981, $361B
• TODAY, $3.7 TRILLION
• 8% CAGR over 71 years
• Puerto Rico represents <2%
Source: SEC.gov
Why Care?
Gross
Potential
Puerto Rico Total Shareholders'
Exposure Assets Equity
Insurer ($MM) ($MM) ($MM)
AMBC 9,863 23,728 1,958
MBI 8,989 14,855 3,729
AGO 8,597 14,544 6,063
Source: Company filings
SUMMARY OF INSURERS'
EXPOSURE TO PUERTO RICO
©Copyright 2016 Cumberland Advisors®. Further distribution prohibited without prior permission. 21
PR: Uninsured vs. Insured
3
4
5
6
7
8
9
10
Puerto Rico Uninsured vs Insured
Uninsured Puerto Rico Insured Puerto Rico
5.00% Due 7/1/41
Call: 7/1/22 Dated: 4/3/2012
5.00% Due 7/1/35
Call: 7/1/22 Dated: 4/3/2012
Source: Bloomberg
©Copyright 2016 Cumberland Advisors®. Further distribution prohibited without prior permission. 22
CHI BoE: Uninsured vs. Insured
1.5
2.5
3.5
4.5
5.5
6.5
7.5
Insured Chicago A Buy?
10YR MMA Uninsured Chicago BoE Insured Chicago BoE - AGMSource: Bloomberg
Upcoming Dates & Events
• Potential defaults in April, May, July 2016 and/or January, 2017
• Timeline for evaluating 2/1/16 restructuring proposal?
• Timeline for evaluating PREPA’s restructuring plan?
• Potential Federal Action via Control Board or Bankruptcy
• Supreme Court review of Puerto Rico’s 7/14 restructuring law
Potential Solutions?
• Tax haven?
• Economic stimulus?
• Debt repudiation?
Contact Us!
• David Hitchcock, [email protected]
• John Mousseau, CFA, [email protected]
• Alan Schankel, [email protected]
• Sean Heberling, CFA, [email protected]