Oil and Gas Issues - Puerto Rico

In addition to a corrupt and inefficient power company, Puerto Ricans have to deal with predatory practices from the oil industry. Low oil prices have not cascaded down to the consumer. They have not even reached the retailer. The oil companies are in dire straits with low fuel prices so it makes sense that they would squeeze the island for more margin.

Link to the article in spanish below. Use Google Translate to translate easily to english.

Link to Article

Puma gas station (2014 Puerto Rico)

Inside the Billion-Dollar Battle for Puerto Rico's Future - The New York Times

Inside the Billion-Dollar Battle for Puerto Rico's Future - The New York Times

Link to Article

I wanted to share the above named article from the December 19, 2015 edition of the New York Times. It provides a great background and overview of events leading up to the current situation. Insight into the political and financial landscape is explained in an easy to understand way. The article  effectively explains the "sides" to each argument. Although they seem clear, they are indeed ambiguous.

Total Debt: 70 Billion USD maturing over 5-10 years

Party 1 - Debtors (Puerto Rican Government (65% of debt, PR Power Authority (35% of debt))
Party 2 - Lenders (20% Puerto Rican; 35% Hedge Funds; 45% Bondholders)
Party 3 - The US Federal Government

What do lenders want?
To get paid. This is the only possible solution for them. They aren't even willing to take a haircut on the debt owed. They will go to any extent to ensure they get what they want. Political contributions, lobbying efforts, will all protest a bailout or debt restructuring of any kind. Even a deal where the Power Authority was allowed to declare bankruptcy (or restructure debt) in an effort to restructure debt (33%) was strongly lobbied against by the holders of that specific debt. The deal would have cost US taxpayers nothing yet it was not even considered. Marco Rubio, for example, is stuck in the middle of a Tea Party base and a Puerto Rican constituency that helped elect him to Senate in Florida.  A supporter of relief for Puerto Rico 6 months ago, Rubio has since backed away from sponsoring a relief bill and now says a "bailout" should be a last resort. Just the fact they are calling it a "bailout" and not "debt restructuring" (like many companies engage in on a regular basis) shows the power of politics.

What do debtors want?
They want to pay the debt but they can't. If they can't pay they want someone to give them the money (bailout) or they want debt restructuring (loan forgiveness). They know they can't pay so they are just waiting for situation to necessitate relief described in the previous sentence. They are also hiring lobbyists of their own to promote a bailout.

What does the US Federal Government want?
They promote stability. They know the debtors can't pay and the lenders will have no mercy. They won't approve a bailout because the lobbyists have done their job with the Republican led Congress. Obama can't successfully pass special Chapter 9 bankruptcy protection for US Territories in a Republican Congress. They don't want a humanitarian crisis to take place on an island where 40% live in poverty so they offer a bandaid in the form of $3 Billion USD if the island submits to financial oversight.

La Perla (North Corner) October 2014

Kicking The Can Down the Road

The Governor of Puerto Rico recently announced a $16 Billion gap over the next 5 years (up from $14B previously forecasted). Furthermore, the gap has been extended from 5 to 10 years. The committee assembled to balance the budget and draft an economic recovery plan (in collaboration with the General Obligation committees) have not been able to accurately realize the true nature of the economic disaster since its inception. Any plan or budget will be futile as the Island only faces an uphill battle with an exodus of the working class and shrinking tax base. These are mere gestures to try to please bondholders (2 have recently filed suit against the Island).

In the last weeks of 2015, Democratic members of Congress tried to persuade members to include bankruptcy protection for the island in a year end spending bill. Speaker Paul Ryan has called for a "responsible" solution by March of 2016. The language was not included and the bill barely passed due to Democratic (and some rebel Republican) pushback.

The Island is using clawback measures to desperately try to meet obligations. Instead of income tax returns, the Island is issuing IOUs. Residents can use tax return credits to pay other municipal fines, fees, and bills. For example, a resident won't get a tax return but they can pay a parking or speeding ticket with funds they should have received.

So the questions remains, who is responsible? Well, everyone is responsible. The banks are responsible, the bondholders are responsible, and the Island lawmakers are responsible. In any agreement there are obligations and each party has risk. Bondholders and lawmakers on both sides (US and Puerto Rico) failed to adequately calculate risk. This seems to be more prevalent in recent times. The only difference is that Puerto Rico doesn't have a golden parachute (i.e. bankruptcy protection or the ability to print money). Should they have protection? This writer thinks YES but that is to be determined. How can other municipalities within the US declare bankruptcy and go on about their daily lives.

At the very least the Puerto Rican people are LEAST responsible because they after all didn't have any say in their territory status (yes it was voted on about 70+ years ago but only after the issue was forced onto the Island). Corruption and an inefficient government have plagued the Island for as long as anyone can remember. Taxes, fuel, and energy prices, unemployment, and the shrinking middle class have plagued the island. The pharmaceutical tax incentives of the 1990s and the recent Act 20/20 legislation are good attempts to draw outside investment but they are also not enough to tackle the whole problem.

What we are witnessing now is just a game of back and forth, a dance, an exhibit of smoke and mirrors, awkward and puzzling actions to keep everyone wondering on the edge of their seats. There is no need to be anxious if you are living on the Island. It can only get better. It can't get worse. The US won't let it become a humanitarian crisis. Not on their watch. The money will come. Puerto Rico will be bailed out in one way or another. The likely source is long duration bonds to restructure debt and reduce obligations outstanding. A general restructure of debt will be necessary. Someone will have to take a haircut.

Islote, PR (near Arecibo) October 2014

Winners and Losers

The moment we have been waiting for us finally here. Puerto Rico has officially defaulted on part of its debt obligations. The island will still make payments to finance its general obligation fund but will not be able to fulfill other bond payment obligations.

The government and the markets are entering unchartered waters due to the unique nature of the island territory to the United States. Bondholders will be sitting on the edge of there seats waiting to see if they are the chosen few that will actually receive payment. This uncertainty will not have a positive impact on the markets. What will other US municipalities do? Detroit, Orange County, and other municipalities facing the same dilemmas now and in the past do not have the luxury to selectively make bond payments. The nature of credit markets is "all or none". Either you pay your bills or you don't. This is a very interesting case study. 

Institutional funds and other investors  will be left holding the bag at the whim of Puerto Rican legislators. Puerto Rico is actually the winner in this situation. How do you squeeze blood from a stone? You can't. Will Puerto Rico be able to borrow money? No. Will the US let one of its territories fall into a humanitarian crisis? Probably not.

Castillo San Felipe del Morro 2014