Puerto Rico GO bonds up on federal healthcare aid ahead of deal deadline

CHICAGO (Reuters) - Benchmark Puerto Rico general obligation bonds rose on Monday, bolstered by promised stopgap federal healthcare spending that would help the financially strapped U.S. territory even as it faces a midnight deadline to reach a restructuring deal on its $70 billion in debt.

The healthcare assistance under a deal on federal government spending follows Saturday’s rejection by bondholders of the Puerto Rican government’s debt restructuring offer to repay as much as 77 percent of general obligation (GO) debt and 58 percent of tax-backed bonds.

Without an agreement or a move by Puerto Rico to seek an in-court debt workout similar to bankruptcy, bondholders and other creditors are expected to file a wave of litigation over the island’s bond defaults starting at midnight Monday.

Bond prices rose in response to Congressional negotiations late Sunday that included a $295 million boost in Medicaid funding for Puerto Rico as part of a budget deal to avoid a U.S. government shutdown.

The federal government’s Medicaid help may be buoying Puerto Rico’s bonds by making “participants hopeful there will be potentially some assistance down the road that mitigates the lowball first salvo in the negotiations,” said Shaun Burgess, portfolio manager and lead trader for Puerto Rico strategy at Sarasota, Florida-based Cumberland Advisors.

Burgess, who is responsible for $150 million of insured Puerto Rican bonds, said the offer was “not even close to a good proposal.”

The spread for Puerto Rico 30-year GO bonds over Municipal Market Data’s benchmark triple-A yield scale fell to 565 basis points on Monday, after widening to 585 basis points on Friday from 575 basis points on Thursday.

Benchmark Puerto Rico bonds due in 2035, and carrying an 8 percent coupon, traded up 1.1 points in price to a bid price of 64.1, up from a record low of 60.05 on March 30.

Regardless of the path Puerto Rico takes, the likelihood is for cuts to government services, including healthcare. Thousands of Puerto Rican’s took to the streets on Monday to protest austerity measures that coincided with traditional May Day labor rallies.

“The money from Washington will get them through their fiscal year, but hard to know if it applies much beyond that,” said Joe Rosenblum, director of municipal credit research at AllianceBernstein in New York.

“I think it was a recognition (on Washington’s part) that they were really in dire straights,” he said.


Puerto Rico’s fiscal turnaround plan, which has been certified by the federal board overseeing its finances, proposes drastic cuts to debt and government services alike, including cuts to healthcare spending.

The island would also cut fringe benefits to some public employees, reduce subsidies to municipalities and the University of Puerto Rico, and cut benefits to pensioners.

Thousands protested the austerity measures on Monday in San Juan, the capital, marching from different points toward the city’s financial center, known as the Golden Mile. Some protesters broke windows and scrawled graffiti on buildings.

There were also some scuffles with police, but no arrests have been reported by authorities. Traffic throughout metropolitan San Juan was affected throughout the morning.

Ramon Rosario, public affairs secretary to Governor Ricardo Rossello, told reporters, “We had some incidents of vandalism,” but overall “government operations are running mostly normally.”

Rosario said most public school and hospital staff reported to work.

The government is still considering filing for bankruptcy, known as Title III under PROMESA, if a last-minute deal cannot be reached, he said.

“If the question is whether we discard Title III, we don’t,” Rosario said in Spanish. “If creditors remain intransigent, we will go to Title III in defense of Puerto Rico’s people.”

Ultimately, the decision of whether and when to file a Title III bankruptcy belongs to the oversight board, not the governor, though both sides have said they hoped to work cooperatively. (Additional reporting by a contributor in San Juan)