March 20, 2018 / 9:40 PM / 9 months ago

Puerto Rico GO bond hits five-month high

NEW YORK, March 20 (Reuters) - Puerto Rico’s benchmark bond price hit a 22-week high on Tuesday, the six-month anniversary of Hurricane Maria, as the island’s federal oversight board prepared to approve a blueprint for the U.S. territory’s debt restructuring efforts.

The board is tasked with helping the bankrupt U.S. territory manage its finances as it navigates the biggest bankruptcy in U.S. government history, trying to shed $120 billion in bond and pension debt.

The board will meet in San Juan to assess Governor Ricardo Rossello’s fiscal blueprint for the island, which will form the basis for debt restructuring talks with creditors. Board Executive Director Natalie Jaresko told Reuters she expects the board to approve the plan.

General obligation bonds maturing in 2035 closed at their daily high of 35.50 cents on the dollar on Tuesday , their highest mark since October 13, 2017. The bonds trade like an equity, giving a price but not a yield because they are technically in default.

They are still down dramatically from before Hurricane Maria struck Puerto Rico in September, decimating infrastructure and killing dozens.

The storm sent the bonds tumbling from about 60 cents to as low as 21 cents in December. They regained ground in February after Rossello revised economic forecasts to project a $3.4 billion surplus, indicating more money to pay debt.

The bonds stabilized later in the month, but have risen again over the last several days, perhaps on expectations that the board will approve the fiscal plan.

“We can’t start getting into the real bankruptcy proceedings until we have an approved plan, so it could be some optimism that we can finally start doing the restructuring,” Height Securities analyst Ed Groshans said.

Maria was cataclysmic for Puerto Rico, cutting electricity to all 3.4 million residents. On the six-month anniversary, tens of thousands remained without power, thousands of homes remained in disrepair, and many businesses remain closed, even as debt prices began to recover.

Other analysts put little stock in the rise in the bond price. “Puerto Rico bonds are almost strictly held by optimists,” said Matt Fabian, of Municipal Market Analytics, adding that the Puerto Rico bond market is “illiquid and strange” and that investor recovery prospects “are still grim.”

To be sure, hurricane recovery is far from the only driver of creditor repayments. Litigation is a factor as well, particularly a fight between the Puerto Rican central government and its sales tax authority, COFINA, which itself owes $18 billion of debt.

The sides are disputing ownership of billions of dollars in Puerto Rican sales tax revenue. The outcome will inform which entity’s creditors can be repaid from that pot. A hearing on the matter is set for April 10.

Prices of COFINA bonds, which are backed by sales tax revenue, suggest investors have put their focus back on the litigation.

Once data began to show sales tax collections bouncing back after Maria, senior COFINA bonds regained most of their pre-storm value. They were trading at 57.6 cents on Tuesday, not far off the 63 cents pre-Maria.

COFINA creditors in a statement last week accused the Puerto Rican government of exaggerating the storm’s impact on sales tax, saying collections were “strong and they continue to trend upward.”

Such creditor mistrust is a nagging problem for Puerto Rican government, and could be part of what is driving the rise in GO trade prices too.

“The vast majority of the investment community doesn’t believe the numbers in the fiscal plan,” Groshans said. “They believe $3.4 billion for debt service is just a starting point, likely to go higher.”

Reporting by Nick Brown; Editing by Daniel Bases

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