What is Puerto Rico s Problem? CFAP Downtown Luncheon Wednesday, March 23, 2016

Transcription

1 What is Puerto Rico s Problem? CFAP Downtown Luncheon Wednesday, March 23, 2016

2 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)

3 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

4 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

5 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

6 Puerto Rico Key Pressure Points 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 Source: Standard and Poor s Puerto Rico rationale published March 22,

7 Overview

8 Overview

9 Selected Non-GO ratings 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. Source: Standard and Poor s Puerto Rico rationale published March 22,

10 Puerto Rico Restructuring Proposal GO: 28% haircut COFINA: 51% haircut Highways Authority, CCD, PFC, GDB, everything else combined: 61% haircut 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 10

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,

12 Source: Bureau of Labor Statistics Overview

13 Puerto Rico and Greece 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,

14 Puerto Rico and Greece Points of Comparison Real GDP Annual Growth Puerto Rico (3.6%), (1.8%), +0.7%, (0.2%), (0.9%) respectively Greece (5.5%), (9.1%), (7.3%), (3.2%), +0.7% respectively Debt/ GDP 44.7% (2014 tax-backed debt supported by the Commonwealthdoes 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 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,

15 Puerto Rico and Greece Points of Comparison Sovereign Status Puerto Rico A U.S. territory only has nonvoting representation in Congress Greece 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 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,

16 PR: Uninsured vs. Insured % Due 7/1/41 Call: 7/1/22 Dated: 4/3/ % Due 7/1/35 Call: 7/1/22 Dated: 4/3/2012 Puerto Rico Uninsured vs Insured Source: Bloomberg Uninsured Puerto Rico Insured Puerto Rico Copyright 2016 Cumberland Advisors. Further distribution prohibited without prior permission. 16

17 PR GO: 8% due The Bellwether February 16, 2016: Governor signs the Puerto Rico Electric Power Authority (PREPA) Revitalization Act March 11, 2014: Puerto Rico issues $3.5 bn of general obligation debt, drawing hedge funds interest January 1, 2016: Commonwealth defaults on Puerto Rico Infrastructure Finance Authority (PRIFA) debt 9 August 1, 2015: Partial default of debt owed by the Public Finance Corp. (PFC) 8 Source: Bloomberg Copyright 2016 Cumberland Advisors. Further distribution prohibited without prior permission. 17

18 Why care? Bondholders as of July 1, , , Oppenheimer Franklin Advisers Goldman Franklin Resources Nuveen Lord Abbett Eaton Vance 60,809 Capital Research & Management Wells Fargo Invesco Other Source: Bloomberg 9/15

19 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

20 Why Care? SUMMARY OF INSURERS' EXPOSURE TO PUERTO RICO 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

21 PR: Uninsured vs. Insured % Due 7/1/41 Call: 7/1/22 Dated: 4/3/ % Due 7/1/35 Call: 7/1/22 Dated: 4/3/2012 Puerto Rico Uninsured vs Insured Source: Bloomberg Uninsured Puerto Rico Insured Puerto Rico Copyright 2016 Cumberland Advisors. Further distribution prohibited without prior permission. 21

22 CHI BoE: Uninsured vs. Insured 7.5 Insured Chicago A Buy? Source: Bloomberg 10YR MMA Uninsured Chicago BoE Insured Chicago BoE - AGM Copyright 2016 Cumberland Advisors. Further distribution prohibited without prior permission. 22

23 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

24 Potential Solutions? Tax haven? Economic stimulus? Debt repudiation?

25 Contact Us! David Hitchcock, John Mousseau, CFA, Alan Schankel, Sean Heberling, CFA,