Puerto Rico says it can’t repay $72 billion debt; $4 billion of muni supply ahead of holiday

By Sheri Kasprzak

New York, June 29 – The municipals market might be ready to wind down ahead of the Independence Day holiday, but there was plenty to talk about Monday as Puerto Rico governor Alejandro Garcia Padilla announced the island is unable to repay debt to the tune of $72 billion, sending the bond market into a frenzy.

The commonwealth is seeking to restructure its debt as the close of its fiscal year approaches in just two days.

Prices on Puerto Rico G.O. debt tumbled on the news.

Trading on Puerto Rico G.O. bonds 8% of 2035 blew up Monday. By midday, the bonds were trading at 69.25 with a 12.11% yield to maturity. Prints were seen Friday at 76.75 with a 10.87% yield to maturity. At market close, the 8% 2035s were at 69.75, or a 12.028% yield to maturity, backing off from a high yield of about 12.255%.

The commonwealth’s 6% of 2016 public improvement bonds were also actively traded Monday with the yield closing the day at 6.368%, coming off a session high of 7.192%. The debt ended Friday’s modest trading session at 3.084%.

The most pressing matter for the troubled commonwealth is a $416 million debt service payment for Puerto Rico Electric Power Authority that is due July 1. Negotiations continue on the payment, but the outlook remains grim.

“We view the probability of non-payment as high,” Alan Schankel, managing director with Janney Montgomery Scott LLC, said on Monday morning.

Fitch knocks P.R. G.O.s to CC

Fitch Ratings took no time downgrading the commonwealth’s G.O. bonds to CC from B after the governor’s announcement.

“The downgrade of the ratings to CC, which indicates Fitch’s belief that default of some kind appears probable, is based on public comments by the governor supporting the broad debt restructuring strategy included in an external report released this morning by GDB [Government Development Bank],” the Fitch report said in part.

“Fitch no longer believes that the commonwealth views G.O. debt as worthy of the higher level of protection that to date has been assumed due to the very strong legal pledge and repeated public statements to this effect. As it is difficult at this point to predict the course that the commonwealth will take from here in pursuing debt restructuring, Fitch does not believe it is meaningful to distinguish among the various securities and with today’s rating action brings all of the commonwealth debt that is rated by Fitch to CC Rating Watch Negative.”

Moody’s Investors Service took no immediate action Monday, but the ratings agency slashed Puerto Rico G.O. bonds to Caa1 from B2 back in February.

Standard & Poor’s also refrained from any ratings action, but Puerto Rico’s G.O. debt was downgraded to CCC+ from B in April.

Yields fall as much as 6 bps

In the broader muni market Monday, a flight to quality led muni prices to rise on the session along with Treasuries, market sources reported. Yields on top-rated municipals were seen lower by as much as 6 basis points.

Despite plummeting prices on Puerto Rico paper, the broader market was bolstered by a significant rally for Treasuries that was spurred by Greece’s decision to shut down banks and set a referendum to decide whether to accept the terms of a bailout – and potentially determine the future of Greece as a member of the euro zone.

Yields on the 30-year Treasury bond and the benchmark 10-year note fell by 16 bps Monday.

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