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Puerto Rico Default "Likely", FT Reports

Tyler Durden's picture


The market just hit a fresh all time high today which means another major default must be just around the horizon. Sure enough, the FT reported moments ago that a Puerto Rico default "appears increasingly likely" and is why creditors are meeting with lawyers and bankruptcy specialists (supposedly Jone Day, which means where Corinne Ball is Ken Buckfire, fresh from its recent league table success with the Detroit bankruptcy, can't be far behind) on Thursday in New York.  The FT cited a restructuring advisor, supposedly desperate to sign the engagement letter with creditors and to force the bankruptcy, who said that "the numbers are untenable" and "to issue new debt the yield would have to rise and where they can’t raise new money they will have to stop paying."

The untenability of PR's cash flows results from a "debt service burden that requires paying between $3.4bn and $3.8bn each year for the next four years. As doubts grow about the ability of the commonwealth to service that debt, the cost of doing so will inevitably rise."

For Puerto Rico bonds, such an outcome would not be exactly a surprise, most recently trading at 61:

The rest of the story is largely known:

If Puerto Rico is forced to take that step, the effects will ripple through the entire $4tn municipal bond market. Because the debt is generally triple tax free, in a world of zero interest rates demand is high and it is distributed widely, including in funds that imply they have no exposure to Puerto Rico.


But yields have gone up nevertheless – and prices down – suggesting the markets are increasingly nervous about prospects for repayment. Estimates on how much of that debt is insured range from 25 per cent to 50 per cent of total issuance.


“Everyone thinks they can get out in time,” the restructuring adviser said.


Puerto Rico cannot really raise taxes much more, since the debt per capita is more than $14,000, while income per capita is almost $17,000, a ratio – at 83 per cent – that makes California, Illinois or New York – each at 6 per cent – models of prudence. Meanwhile, at 14 per cent, the unemployment rate is twice the national average.

What would make a Puerto Rico default more interesting is that as in the case of GM, political infighting would promptly take precedence over superpriority and waterfall payments. According to the FT, "any radical step, which the local government denies considering, would involve significant legal wrangling. Congress could step in and create an insolvency regime, lawyers say, since it has comprehensive jurisdiction, but that too would give rise to partisan fighting. The Democrats would say that pension claims have priority while the Republicans would uphold the priority of payments to bondholders, citing the constitutional sanctity of contracts."

Of course, since in the US a bond contract now is only worth the number of offsetting votes it would cost, nobody really knows what will happen. And so, we sit back and watch, as yet another muni quake appears set to hit the US, in the process obviously sending the S&P to higher, record highs.

In the meantime, keep an eye on bond insurers AGO and MBI which have taken on water in today's session precisely due to concerns over what a Puerto Rico default would do to their equity.

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Wed, 01/15/2014 - 15:37 | 4334896 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

2014 the year of the default....

Wed, 01/15/2014 - 15:46 | 4334926 Headbanger
Headbanger's picture

My bad for drinking scotch and tequila instead of rum! 

Wed, 01/15/2014 - 15:49 | 4334941 stant
stant's picture

and me for drinking burbon untill the japs wanted to buy the co.

Wed, 01/15/2014 - 16:02 | 4334986 0b1knob
0b1knob's picture

The treasury dept. announced last Fall there would be no PR bailout.


Because there is NO WAY this administration would say one thing and then do the opposite.   Of course there would have to be window of opportunity for Obama's buddies on wall street to buy up PR bonds for a quick profit before they get par on them in a bailout.

Who is buying PR bonds right now?   And why are they paying 70 cents on the dollar if they are shortly to be worth nothing?   An article on that subject would be interesting.

Wed, 01/15/2014 - 16:06 | 4335005 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

PR is not a swing state and has no Congresscritters. Obummer cares less. Let the motherf*^&er burn.

Wed, 01/15/2014 - 16:19 | 4335058 Headbanger
Headbanger's picture

This really goes to show what a give a shit "president" we have  when Puerto Rico is left as an orphan of these United States when it is one of the gems of this country regardless of its territorial standing.

Just goes to show how narrowly minded these New York and DC elites really are!

This is terrible for the good people of Puerto Rico.

And what about Guam??   Or all the other just "fly over" parts of this nation who don't really matter to the elites in New York and DC  cause they see them as just "places on the map"


Wed, 01/15/2014 - 17:12 | 4335244 cro_maat
cro_maat's picture

I think OB1Knob is on to something as the offshore tax laws were changed in 2013 making it competitive with BVI et al. John Paulson moved his shop to PR last year and I am hearing from other HFs that they are looking to relocate there. These same HFs are predicting that San Juan will be the new U.S. gateway for Latin American $ (stealing thunder from Miami). I would bet that Paulson and the rest of the HF crowd are busy buying up this debt and will be sitting down with the O-Puppet soon to let him know what his cut will be once he bails out PR for the good of the country.

Wed, 01/15/2014 - 17:43 | 4335362 Bangin7GramRocks
Bangin7GramRocks's picture

Fuck them. They could already be a state and sucking from the gubmint tit like most of the red states in this country. They chose to remain independent. Puerto Ricans will remember fondly the days before the bankers owned the beaches and closed them to the public.

Wed, 01/15/2014 - 17:56 | 4335398 eurogold
eurogold's picture

U.S. should have cut Peurto Rico loose long ago. Lived there in the 80's. Was a disaster then, and always will be

Wed, 01/15/2014 - 18:09 | 4335436 Ying-Yang
Ying-Yang's picture

Nearly 200 Years Later, these Words Endure:

The frustration among the taxpayers has nearly reached a 15 year high, so Puerto Rico must tread carefully in these simmering waters. If they press too hard, could Puerto Rico be on the precipice of destruction the French historian, Alexis de Tocqueville, first wrote about nearly two hundred years ago. To quote him accurately, “the American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.” Surely, Puerto Rico is much farther along this road than the United States of America. Let’s just hope the possible contagion from this Caribbean chaos stays well clear of American shores.  The delicate US bond market, is in no shape for this shock.


Wed, 01/15/2014 - 18:43 | 4335551 eurogold
eurogold's picture

They suck on the teet now and thats why they love the status quo. Confront them with independance and they are pussies. They must be cut off now !

Wed, 01/15/2014 - 17:58 | 4335399 LMAOLORI
LMAOLORI's picture



I live in fly over land and I sure as hell don't want to bail out Puerto Rico.   I feel the same way about Detroit and they are actually part of America.  They made their beds let them lie in them. The US in the U.S. Government is US the taxpayers.  And for the record I was against bailing out the banks but two wrongs don't make a right.


If you feel so strongly about it Headbanger send them a check but leave me out of it.



Wed, 01/15/2014 - 16:22 | 4335070 Blues Traveler
Blues Traveler's picture

Das Sphincter O will figure out an extortion angle to keep PR on life support.  I am a buyer.

Wed, 01/15/2014 - 16:22 | 4335071 kaiserhoff
kaiserhoff's picture

How can they be broke?

All of the Porto Ricans are on welfare down in Florida.

Wed, 01/15/2014 - 16:51 | 4335179 Jack Burton
Jack Burton's picture

Ha! There actually is some truth to that statement. I believe that many of the people used to go to New York City, but that was in the days when work was to be had. Now that Welfare is the draw, I can see Florida as the natural home for people from Porto Rico.

Wed, 01/15/2014 - 18:37 | 4335540 eurogold
eurogold's picture

Why do Puerto Ricans leave Puerto Rico ? Because it is a shithole and they can benefit from more when they are here

Wed, 01/15/2014 - 18:37 | 4335536 MarsInScorpio
MarsInScorpio's picture



Obviously you have failed to count the number of PR votes in the Blue states. Why do you think they haven't cut the island off onto its own and let it try nationhood.


Statehood never goes anywhere - the PRon PR vote it and independence down everytime it hits the ballot. They like all those US welfare programs without the Federal Income tax on them. It's quite a scam for them on our dime.


So the Dems will want to look good for all those PRs living in NYC who still keep up the flavor of "The Old Country" by letting their chickens run free through the house - and get them to keep voting for communists lke De Blasio.


I say give them independence and work out the bonds on their own. Now that would be funny when they tell the bondholders that the PR that issued the bonds no longer exists . . .


Sorry for lacking compassion for "the sanctity of the contract" but considering who will take it in the fanny, I can't help but enjoy watching the criminal class take a hit.


Wed, 01/15/2014 - 18:39 | 4335541 eurogold
eurogold's picture

Spot on !

Wed, 01/15/2014 - 16:06 | 4335002 max2205
max2205's picture

Bailout for them...bail in for you

Wed, 01/15/2014 - 16:15 | 4335044 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Not so black swan? No surpise here, but the reprocussions?

Wed, 01/15/2014 - 16:07 | 4335008 eclectic syncretist
eclectic syncretist's picture

Bacardi is great, but DonQ is better!

Wed, 01/15/2014 - 18:00 | 4335405 eurogold
eurogold's picture

Bacardi is a known Mafia (which also produces Don Q, which is cheaper trash ) I don't buy anything owned by Bacardi to avoid this Mafia

Thu, 01/16/2014 - 04:08 | 4337119 gallistic
gallistic's picture

Wrong- Bacardi does not produce Don Q.

Serralles distillery produces Don Q.

Wed, 01/15/2014 - 17:53 | 4335394 eurogold
eurogold's picture

They did, didn't they ? Jim Beam went to Suntory I thought. p.s. I hate bourbon ( love Rye ) but drink scotch

Wed, 01/15/2014 - 15:47 | 4334930 Inthemix96
Inthemix96's picture


Right on the money mate, this year it kicks off.

I have no doubt in my my mind that 'Bernsplinks', will be peeled alive and filmed from a helicopter, 'cos the coppers will shit their pants.

If you know what I mean....


Wed, 01/15/2014 - 15:56 | 4334961 superflex
Wed, 01/15/2014 - 16:27 | 4334993 Hippocratic Oaf
Hippocratic Oaf's picture

There is already a rebuttal on bloomberg as this being a buying opportunity. This is NOT an offical meeting of credotors, rather some conference sponsored by an ambulance chasing law firm.


Wed, 01/15/2014 - 16:05 | 4334996 NoDebt
NoDebt's picture

"I have no doubt in my my mind that 'Bernsplinks', will be peeled alive and filmed from a helicopter, 'cos the coppers will shit their pants.

If you know what I mean...."

I don't.  I'm really trying, too.  You're damned near indecipherable.  Boris Alotovcrap is easier to comprehend.  

I'm not sure, but I THINK I disagree with your point.

Wed, 01/15/2014 - 16:28 | 4335108 Inthemix96
Inthemix96's picture

No problems NoDebt.

Use your imagination, and think the very worst if enough people wake up.

Nowhere to run, nowhere to hide mate.


Wed, 01/15/2014 - 16:43 | 4335156 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

If I am right Meredith Whitney should be Time's 2014 person of the year hands down.

Wed, 01/15/2014 - 18:08 | 4335431 icanhasbailout
icanhasbailout's picture


Wed, 01/15/2014 - 18:21 | 4335489 astoriajoe
astoriajoe's picture

You're obviously not well DCH. Seek medical attention soon.

Wed, 01/15/2014 - 18:24 | 4335503 eurogold
eurogold's picture

Puerto Rico is a shit hole since the 80's when I lived there. U.S. should cut them off since they only suck on the U.S. teet. And that for far too long !

Wed, 01/15/2014 - 23:46 | 4336715 Theosebes Goodfellow
Theosebes Goodfellow's picture

You know, eurogold, that's the second time you've said that, (like the first time was a warm-up). I'm really sorry you didn't enjoy you're time there. You probably never quite got past the language barrier. Borinquen is a beautiful place, filled with lovely, warm people.

As far as the "US cut(ting) them off since they only suck on the U.S. teet(sic)", I presume that either you forgot, (or never bothered to find out), that Puerto Ricans have been serving bravely in the U.S. armed forces not only since before your sorry punk-ass was born, but since before your momma's sorry punk-ass was born as well. Boriquas have fought and died in every armed conflict since WWI, on up through today all around the world in ALL branches of the military. Frankly, your statements are offensive and do you no service.

Puerto Rico geographically gives the US a forward base from which to exert influence far into the Atlantic Ocean and Caribbean Sea. It is the #1 locale for the interdiction of drugs coming up the Leeward Islands chain. (What was that again about "only sucking on the US teet(sic)?)

So again, sorry you had a lousy PR life experience. Get over yourself and move on.

Wed, 01/15/2014 - 15:43 | 4334909 SheepDog-One
SheepDog-One's picture

FORWARD! Hey we don't care how many countries have to crumble and how many people have to die....must....save....central....banksters.

Wed, 01/15/2014 - 20:45 | 4336052 Pseudonymous
Pseudonymous's picture

Last economic crisis brought the world economy to the edge of the abyss. Indeed, since then we've made a bold step FORWARD.

Wed, 01/15/2014 - 15:45 | 4334910 NoDebt
NoDebt's picture

I said this 6 months ago.  Even Uncle Joe Biden agrees with me that this is a 'big f'ing deal!"

Somebody wake up Meredith Whitney, please.

Wed, 01/15/2014 - 15:47 | 4334929 Headbanger
Headbanger's picture


Wed, 01/15/2014 - 15:49 | 4334938 NoDebt
NoDebt's picture


Wed, 01/15/2014 - 15:42 | 4334914 twh99
twh99's picture

I know that cities have their own chapter in US Bankruptcy law and that states do not.  Is there a provision in bankruptcy law for protectorates and territories?  Or will PR be filing bankruptcy for a specific district (ie sewer, water)?

Wed, 01/15/2014 - 15:57 | 4334964 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

Bankruptcy should be covered under US federal jurisidiction not territorial courts. Puerto Rico and Washington D.C. are the only 2 non states covered by United States district courts as per Article III of the US Constitution. All other territories like Guam for example are covered by territorial courts as per Article IV of the US Constitution and as such bankruptcy matters are handled by territorial courts in each locality.

Wed, 01/15/2014 - 16:26 | 4335095 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

As such Puerto Rico sets the ground rules in the federal courts for how and what states can do to restructure debts when the whole state goes tits up and declares bankruptcy just like Detroit is blazing the same trail for municipalities right now in federal court. One of these Socialist paradises like California will be following suite shortly there after once Puerto Rico sets the ground rules.


Wed, 01/15/2014 - 18:31 | 4335521 eurogold
eurogold's picture

Puerto Rico sets the rules ? Excuse Me but Puerto Rico has been sucking on the U.S. teet for how long ?

U.S. must cut them off asap !


Wed, 01/15/2014 - 23:54 | 4336734 Theosebes Goodfellow
Theosebes Goodfellow's picture

From wikipedia: Puerto Ricans have participated in many of the military conflicts in which the United States has been involved. For example, they participated in the American Revolution, when volunteers from Puerto Rico, Cuba, and Mexico fought the British in 1779 under the command of General Bernardo de Gálvez (1746–1786),[2] and have continued to participate up to the present-day conflicts in Iraq and Afghanistan.[3]


65th Infantry Regiment

Wed, 01/15/2014 - 16:28 | 4335111 PlausibleDenial
PlausibleDenial's picture

Thanks.. Good info.

Thu, 01/16/2014 - 02:56 | 4337061 SmittyinLA
SmittyinLA's picture

PR is subject to US law until they're not, bankruptcy and the right to discharge unpayable debt could trigger a PR US protectorate exit then nationalization of industries and debt dump. Theoretically PR can and will vote to unaffiliate with America the second the subsidies run out, and then stiff all their bondholders, unlike the other 57 states who cannot escape US national debt PR can.

Wed, 01/15/2014 - 15:42 | 4334915 666
666's picture

So when is the USSA going to declare bankruptcy? There is no way they can ever pay off their debt and probably can't print fiat fast enough to cover it anymore.

Wed, 01/15/2014 - 15:54 | 4334958 101 years and c...
101 years and counting's picture

the day the fed started monetizing the debt is the day the US defaulted. 

Wed, 01/15/2014 - 16:13 | 4335036 aerojet
aerojet's picture

Sure, but Japan has been doing that for decades already and the cracks are only just becoming big enough to drive a truck through.

Wed, 01/15/2014 - 16:09 | 4335016 Hippocratic Oaf
Hippocratic Oaf's picture

"So when is the USSA going to declare bankruptcy? "

When interest rates finally re-set and our leaders realise that maybe we shouldn't have printed so much fuckin money.

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