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Puerto Rico&#39;s Debt Crisis: How It Happened And Why A $1 Billion Default Is Coming Friday

Puerto Rico bonds took a huge hit last week when President Trump suggested the U.S. government may eliminate the nation&rsquo;s debt in wake of its ongoing financial crisis.
&ldquo;They owe a lot of money to your friends on Wall Street, and we&rsquo;re going to have to wipe that out,&rdquo; Trump said in an interview with Fox News. Puerto Rico currently owes $13 billion of general-obligation debt and $72 billion in total debt.
Related Link: <a href="https://www.benzinga.com/general/education/17/06/9614337/puerto-rico-wants-to-become-a-state-heres-what-that-means">Puerto Rico Wants To Become A State; Here&#39;s What That Means</a>
The suggestion that bondholders could be the ones left holding the bag in Puerto Rico sent the price of the island&rsquo;s general obligation bonds tanking to just 37 cents on the dollar last Wednesday, down from 56 cents a month ago.
<h3>Who Loses?</h3>
<ul>
<li>Here&rsquo;s a look at some of the bondholders and bond insurers that could be hit hardest if Puerto Rico&rsquo;s slate is wiped clean.</li>
<li>Assured Guarantee Ltd. (NYSE: <a class="ticker" href="/stock/ago#NYSE">AGO</a>) had a net par exposure to Puerto Rico of about $5 billion as of the end of June.</li>
<li>Ambac Financial Group, Inc. (NASDAQ: <a class="ticker" href="/stock/ambc#NASDAQ">AMBC</a>) had a net par exposure of $2.1 billion as of the end of June.</li>
<li>The Baupost Group, managed by billionaire value investor Seth Klarman, <a href="https://theintercept.com/2017/10/03/we-can-finally-identify-one-of-the-largest-holders-of-puerto-rican-debt/">recently disclosed</a> that it owns nearly $1 billion in Puerto Rican debt. Klarman apparently doesn&rsquo;t personally own any Puerto Rican debt.&nbsp;</li>
<li>A group of hedge funds, including Aurelius Capital Management, Autonomy Capital (Jersey), FCO Advisors, Franklin Mutual Advisers, Monarch Alternative Capital, Senator Investment Group and Stone Lion, collectively owns $3.3 billion of Puerto Rican debt, according to new <a href="https://www.bloomberg.com/news/articles/2017-07-13/hedge-funds-disclose-just-how-many-puerto-rico-bonds-they-own">court documents</a>. Autonomy Capital holds the most general obligation debt of the group at $937.6 million.</li>
</ul>
<h3>Little Guy The Biggest Loser</h3>
Everyday Americans, including individual bond investors and mutual fund investors, reportedly have the largest <a href="https://www.cnbc.com/2017/10/04/if-you-dont-think-you-own-puerto-rico-debt-youre-most-likely-wrong.html?recirc=taboolainternal">overall exposure</a> to Puerto Rican debt. Puerto Rico Clearinghouse estimates that there are more than half a million individual Puerto Rican bondholders and hundreds of thousands of investors who own the bonds via funds such as the SPDR Series Trust (NYSE: <a class="ticker" href="/stock/hymb#NYSE">HYMB</a>), the Van Eck Vectors Short High-Yield Municipal Index ETF (NYSE: <a class="ticker" href="/stock/shyd#NYSE">SHYD</a>) and the PowerShares New York AMT-Free Municipal (NYSE: <a class="ticker" href="/stock/pzt#NYSE">PZT</a>).
<h3>Time To Buy?</h3>
Surprisingly, some investors see Trump&rsquo;s words as an opportunity to buy. Highland Capital co-founder Mark Okada said his $18 billion hedge fund is looking into the possibility of buying Puerto Rican debt on the cheap.
&ldquo;I think people are overreacting to what Trump said,&rdquo; Okada said <a href="https://www.cnbc.com/2017/10/05/highland-capitals-okada-says-hes-taking-a-look-at-puerto-rico-bonds.html">last week</a>.
MKM Partners analyst Harry Fong also sees opportunity for investors.
&ldquo;The shares of the bond insurers are all down sharply today on Trump&rsquo;s comments and, in our view, this could present an opportunity to acquire the shares at well below fair value,&rdquo; he wrote. MKM maintains Buy ratings for Assured Guarantee and MBIA.
Related Link: <a href="https://www.benzinga.com/news/17/10/10148482/elon-musk-offers-to-rebuild-puerto-ricos-energy-infrastructure">Elon Musk Offers To Rebuild Puerto Rico&#39;s Energy Infrastructure</a>
_________ 
Image Credit: By Staff Sgt Michelle Y. Alvarez-Rea, U.S. Air National Guard (President Trump Visits Puerto Rico) [Public domain], <a href="https://commons.wikimedia.org/wiki/File:President_Trump_Visits_Puerto_Rico_171003-Z-KL947-224.jpg">via Wikimedia Commons</a>

Trump Claims Puerto Rico's Bond Debt Will Be 'Wiped Out,' Here's Who'd Lose Big

The fact that the United States&#39; $18 trillion economy is the largest in the world in terms of GDP is no secret. However, did you know that the state of California was the sixth largest economy in the world, with a larger GDP than France, India, Italy or Brazi?. Impressive, right?

	But, how do the rest of the country&#39;s state economies compare to other national economies?

	The <a href="https://www.aei.org/publication/putting-americas-ridiculously-large-18t-economy-into-perspective-by-comparing-us-state-gdps-to-entire-countries/">American Enterprise Institute</a> recently published a map comparing the gross domestic product (GDP) of U.S. states with that of whole countries &mdash; using 2015 state-level GDP data from the <a href="http://www.bea.gov/iTable/iTable.cfm?reqid=70&amp;step=1&amp;isuri=1&amp;acrdn=2#reqid=70&amp;step=1&amp;isuri=1">Bureau of Economic Analysis</a> (BEA) and country-level GDP data from the <a href="http://www.imf.org/external/pubs/ft/weo/2016/01/weodata/weorept.aspx?sy=1980&amp;ey=2015&amp;scsm=1&amp;ssd=1&amp;sort=country&amp;ds=.&amp;br=1&amp;pr1.x=18&amp;pr1.y=13&amp;c=512%2C672%2C914%2C946%2C612%2C137%2C614%2C546%2C311%2C962%2C213%2C674%2C911%2C676%2C193%2C548%2C122%2C556%2C912%2C678%2C313%2C181%2C419%2C867%2C513%2C682%2C316%2C684%2C913%2C273%2C124%2C868%2C339%2C921%2C638%2C948%2C514%2C943%2C218%2C686%2C963%2C688%2C616%2C518%2C223%2C728%2C516%2C558%2C918%2C138%2C748%2C196%2C618%2C278%2C624%2C692%2C522%2C694%2C622%2C142%2C156%2C449%252">International Monetary Fund</a>.

	<a href="https://www.benzinga.com/files/u82070/stategdp.jpg"><img alt="" src="https://www.benzinga.com/files/u82070/stategdp.jpg" style="width: 600px; height: 392px;" /></a> 
Source: AEI

	California&rsquo;s 2015 GDP is comparable to that of France, $2.46 trillion for the former versus $2.42 trillion for the latter. However, in terms of GDP per capita, California has a very large lead, as its population of roughly 38.8 million is much smaller than France&rsquo;s 66.03 million. In terms of workforce, the difference becomes smaller, but still very significant: 19 million workers for California, compared to 25 million workers for France.

	<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/analyst-ratings/analyst-color/16/08/8372661/a-rate-hike-before-the-election">A Rate Hike Before The Election?</a></bzrelatedlink>

	Second in line is Texas, with a 2015 GDP of $1.59 trillion, which would have made it the tenth largest economy in the world, ahead of countries like Canada ($1.55 trillion), Mexico or Switzerland. And, again, Canada needed 50 percent more workers (18 million) to reach the same production level as Texas.

	New York trails Texas from close behind, with a GDP of $1.44 trillion, comparable to South Korea&rsquo;s $1.38 trillion.

	Interestingly, these three states combined produced $5.5 trillion in economic output in 2015. This figure surpasses the GDP of Japan ($4.1 trillion), only falling behind China and the United States as a whole &mdash; including these three states.

	<a href="https://www.benzinga.com/files/u82070/stategdpnew.png"><img alt="" src="https://www.benzinga.com/files/u82070/stategdpnew.png" style="height: 1269px; width: 600px;" /></a> 
Source: AEI

	Do you have ideas for articles/interviews you&#39;d like to see more of on Benzinga? Please email <a href="mailto:feedback@benzinga.com">feedback@benzinga.com</a> with your best article ideas. One person will be randomly selected to win a $20 Amazon gift card!

	Disclosure: Javier Hasse holds no interest in any of the securities or entities&nbsp;mentioned above.

How Large Are U.S. State Economies? This Map Shows California's Edge Over France, And More

On July 1, 2016, Puerto Rico will default on more than $1 billion in general obligation bonds, the island&#39;s senior credits protected by a constitutional lien on revenues. -Puerto Rico Governor Alejandro Garc&iacute;a-Padilla.
On Wednesday, Garc&iacute;a-Padilla wrote an article for <a href="http://www.cnbc.com/2016/06/29/puerto-ricos-governor-warns-of-imminent-default-on-more-than-1-billion-in-debt-commentary.html">CNBC</a> explaining why the commonwealth he governs will default again on Friday. &ldquo;Puerto Rico does not have the ability to repay the $70 billion debt that was generated by past administrations and their creditors. The debt must be restructured fairly and equitably to both the people of Puerto Rico and the bondholders,&rdquo; the note explained.
<h3>How Puerto Rico Got In So Deep</h3>
Puerto Rico&rsquo;s financial crisis began years ago when its government started issuing debt seeking to cover its public spending deficit &mdash; a very common practice in emerging economies. The catch here was that the municipal bonds and other debt titles were tax-exempt (some say, triple tax-exempt) for U.S. investors and paid higher yields than most other munis. So, the bonds became very popular and easy to place.
However, as corporate tax breaks on the island expired in 2006, a lot of business fled, leaving a large portion of Puerto Rico&rsquo;s population jobless and its government dealing with more than it could handle. This led it to issue even more debt.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/news/16/06/8140107/puerto-rico-being-sued-by-hedge-funds-for-dodging-payments">Puerto Rico Being Sued By Hedge Funds For Dodging Payments</a></bzrelatedlink>
However, unlike other American cities and states, the island was not allowed to file for bankruptcy, and therefore, could not get a court order to restructure its debt. In addition, the commonwealth was not allowed to borrow from the IMF, as it was not a sovereign nation either.
To make a long story short, the island was in trouble, as it had spent even more than it had borrowed, and, thus, could not return the money, neither could it easily restructure its obligations.
<h3>What Now?</h3>
On Wednesday, Puerto Rico&rsquo;s governor said the island would go into default, yet again, stressing the need for a long-term restructuring plan that&rsquo;s fair and equitable &ldquo;to both the people of Puerto Rico and the bondholders.&rdquo; And, a restructuring could finally come&hellip;or so it seems.
Earlier on Wednesday, <a href="http://www.bloomberg.com/politics/articles/2016-06-29/puerto-rico-debt-bill-clears-biggest-remaining-hurdle-in-senate">Bloomberg</a> reported a bill that would allow the commonwealth to access some of the bankruptcy protections other U.S. states enjoy seemed close to passing &mdash; and could be approved as early as Thursday, as it had already passed the threshold it needed in the Senate. Moreover, the White House has stated that the president will sign the measure, if accepted by the Congress. Of course, a break would come with certain obligations, like spending cuts and external oversight.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/analyst-ratings/analyst-color/16/05/7914458/puerto-ricos-default-hurts-local-investors-the-most">Puerto Rico's Default Hurts Local Investors The Most</a></bzrelatedlink>
While Garc&iacute;a-Padilla expressed his discomfort with the oversight Congress wants to impose, arguing it would undermine the democratic Independence of the Commonwealth, he accepted it as the best choice available. Moreover, he said, whatever the Congress decides, Puerto Rico will still default on Friday.
&ldquo;The emergency measures we have taken are unsustainable, harm our economy, reduce revenues and diminish our capacity to repay our debts. Puerto Rico cannot endure any more austerity,&rdquo; he elaborated.
&ldquo;We are facing a government less capable of providing the services which the public needs,&rdquo; the governor added, making allusion to the cuts in education and healthcare that the so-called vulture funds (some hedge funds that own the debt and claim they &ldquo;should be paid before essential services&rdquo;) are asking for.
&ldquo;As governor, I will use my remaining time in office to benefit from the tools provided by PROMESA and develop a fiscal plan that is faithful to the best interests of the people of Puerto Rico,&rdquo; he concluded.
Check out Broadway star Lin-Manuel Miranda asking bondholders and the U.S. Government to help relieve Puerto Rico&rsquo;s situation&hellip;with a rap!

	&nbsp;

	<iframe allowfullscreen="" frameborder="0" height="315" src="https://www.youtube.com/embed/0Evat-L7djc" width="560"></iframe>

	&nbsp;

	Disclosure: Javier Hasse holds no interest in any of the securities or entities mentioned above.

Puerto Rico's Debt Crisis: How It Happened And Why A $1 Billion Default Is Coming Friday

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