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Puerto Rico Bondholders Face Bigger Loss as Hurricane Toll Grows

Michelle Kaske

Even before Hurricane Maria devastated Puerto Rico, leaving billions of dollars in damage and crippling the electricity system, the island’s government said it could repay less than a quarter of what’s owed to bondholders over the next decade. Now, even that may be optimistic.

Prices of the U.S. territory’s bonds have plunged to record lows, signaling investors expect that there will be even less money available to repay its $74 billion of debt. On Friday, Puerto Rico’s federal overseers, who are in charge of pulling it from a financial collapse, plan to reassess the island’s fiscal plan -- including how much debt it can pay -- in light of the storm, according to a person familiar with the matter.

Bondholders “will have to experience some amount of pain or financial devaluation of their stakes,” said David Tawil, president and co-founder of Maglan Capital LP, which no longer owns Puerto Rico bonds. Tawil estimates some prices will need to drop by as much as 20 percent, given the hit that Maria will deal to tax collections. “I don’t think anybody has any appreciation for how devastating the effects of the storm will be."

Puerto Rico has little financial ability to navigate the disaster on its own, leaving the recovery heavily dependent on how much aid comes from Washington. It began defaulting on its debts two years ago, seeking to avoid draconian budget cuts officials said would deal another blow to an already shrinking economy. With nearly half of its 3.4 million residents already living in poverty, the government filed for bankruptcy protection in May.

Municipal bankruptcies are rare, so it was already difficult for analysts to estimate how much bondholders will recoup, especially given that Puerto Rico’s broke pension fund owes some $49 billion to workers and retirees.


Tim Holler