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Hurricane Maria may spell more trouble for Puerto Rico bondholders
September 22, 2017 / 6:01 PM / a month ago

Hurricane Maria may spell more trouble for Puerto Rico bondholders

NEW YORK (Reuters) - Hurricane Maria could imperil Puerto Rico’s long-term economic recovery and hinder its ability to pay back bondholders waiting for the U.S. territory to emerge from years of financial strife, analysts and investors said.

A man walks next to damaged houses and fallen trees in Guayama, Puerto Rico. REUTERS/Carlos Garcia Rawlins

Maria made landfall on Puerto Rico midweek and tore across the island of 3.4 million people, destroying buildings and downing nearly all power and communications.

Disaster modeler Enki Research estimates damage to the island at $30 billion, with $20 billion in direct physical damage and $10 billion in economic impact.

“The conclusion is it’s not good for bondholders because they (Puerto Rico) will have reduced economic capacity to pay back debt,” S&P Global Ratings analyst David Hitchcock said.  

Struggling under $72 billion in debt, Puerto Rico filed the biggest government bankruptcy in U.S. history earlier this year.

Complicating recovery efforts, Puerto Rico is under the oversight of a federally-appointed Financial Oversight and Management Board. It cannot issue new debt or change its budgetary allocations without approval.

    The board on Thursday approved reallocating up to $1 billion of the budget to be used for emergency funding, though the cost of cleanup is expected to dwarf that.

Destruction from Maria, which struck less than three weeks after Hurricane Irma, could stymie much needed economic growth. Manufacturing is expected to be temporarily halted as the island deals with power outages, and a drop in tourism would reduce sales tax and other revenue used to service bonds, Hitchcock said.

Still, Hurricane Maria likely won’t affect the credit rating agency’s “D” rating of Puerto Rico’s general obligation and sales tax bonds. “From a credit perspective, you can’t get worse than that,” Hitchcock said.

Prices on Puerto Rico general obligation bonds were slightly lower in thin trading post-hurricane, moving closer to about half of par value in the $55.75 to $54.75 range, according to Municipal Market Data, a unit of Thomson Reuters.

“Certainly if you look at it from a perspective of where bonds are (trading) they generally think that Maria is going to have some sort of an impact on the island,” said Jonathan Mondillo, portfolio manager at Alpine Woods Capital Investors LLC, which holds insured Puerto Rican bonds.

The timeliness of Federal Emergency Management Agency funds will play into how quickly Puerto Rico gets back on its feet, Hitchcock said.

“Given the relief money they are going to get just to rebuild the island, I would bet that will put the bondholders further back in line to receive any payments,” said Christopher Ryon, a portfolio manager at Thornburg Investment Management, who does not own any Puerto Rico debt.

Reporting by Laila Kearney, additional reporting by Jennifer Ablan, Karen Pierog, David Randall and Trevor Hunnicutt, editing by Megan Davies and Chizu Nomiyama

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