Puerto Rico, US Treasury Consider 'Superbond' to Fix Debt Crisis
Puerto Rico and the U.S. Treasury Department engaged in talks about a possible restructuring of the commonwealth's $72 billion debt, which would mark an important change in the relationship with the federal government.
Officials from both parties are discussing a possible "superbond" to be administered by the Treasury or a third party, which would also administer an account holding at least some of Puerto Rico's tax collections, The Wall Street Journal explained.
Current Puerto Rico bondholders would be issued superbonds in exchange for outstanding debt at a negotiated ratio and would be paid with funds from said account. Investors thus would likely have to take a "haircut" on the value of their holdings, but would have higher chances of being repaid, the newspaper detailed.
The idea comes with logistical, political and legal challenges, and it remains unclear whether it can be implemented, The New York Times noted.
"Right now, Puerto Ricans don't even like to pay taxes to their own government," an unknown source, who the newspaper said was familiar with the discussions, told The New York Times. And if the IRS were to replace local tax authorities, "people would say, 'Go to hell. I'm not paying the U.S. government,'" the source added.
Puerto Rico bond prices, meanwhile, did not evidence major changes on Thursday, an indicator that suggests that investors are doubtful of the rumored superbonds, Bloomberg reported.
"It's still new," Deutsche Bank's Gary Pollack told the business publication. "It's still in its infancy, so you can't get too excited about it as a bond investor. I would hold and wait for this thing to play out more," added Pollack, who manages $6 billion of municipal debt, including Puerto Rico bonds, as head of fixed-income trading at the bank's Private Wealth Management unit in New York
Meanwhile, Daniel Hanson, an analyst at Height Securities, a Washington-based broker dealer, pointed to some of the proposal's legal hurdles.
"It would probably take some kind of congressional intervention in order to make this type of transaction take place," Hanson noted. "And Congress certainly doesn't have the bandwidth between now and the end of the calendar year to really seriously dig into Puerto Rico."
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