Puerto Rico, facing absolute devastation after Hurricane Maria barreled through last week, desperately needs immediate funding to restore critical infrastructure, particularly its hobbled electric grid. The entire island — home to over 3.5 million American citizens, roughly equivalent to the state of Connecticut — lost power, and satellite imagery shows how little electricity has come back. This affects not only electricity and telecommunications service but access to clean water, as many pumping stations run on the same grid.
A group of bondholders, who own a portion of Puerto Rico’s massive $72 billion debt, has proposed what they are calling relief — but in the form of a loan. So they’re offering a territory mired in debt the chance to take on more debt.
The announcement came after The Intercept spent two days reaching out to 51 of Puerto Rico’s known creditors, asking them if they would support a moratorium or cancellation of debt payments for the island, given the humanitarian crisis. Prior to this announcement, only three of the 51 creditors had so much as donated relief funds to charity or offered sympathy for island residents, all of them banks who actually have to face consumers, and so are a bit more adept at handling public relations. No creditor had supported debt relief.
Of the 51 creditors contacted by The Intercept, only Citibank, Goldman Sachs, and Scotiabank have pledged no-strings-attached money for Puerto Rico and other Caribbean islands, in the form of donations to relief organizations totaling $1.25 million. Citi has also waived certain fees for citizens within disaster zones.
Puerto Rico’s other creditors contacted by The Intercept would not say whether donations were made by their firms or their top executives, which include some of the richest people on earth. Holders of Puerto Rican debt have included John Paulson, who got rich betting against the housing market during the financial crash; Jeffrey Gundlach of DoubleLine Capital, who in 2015 called Puerto Rican debt his “best idea” for investors; and Marc Lasry of Avenue Capital Group and co-owner of the Milwaukee Bucks NBA team.
The creditor lists were assembled by Puerto Rico’s Center for Investigative Journalism in 2015 and supplemented by additional media reports. In addition, the federal bankruptcy-like process in Puerto Rico forced holders of one type of debt, so-called “COFINA” bonds backed by sales tax revenue, to reveal themselves. A full list of known Puerto Rican bondholders and their responses to The Intercept’s inquiries appear at the end of this article.
Experts see even the offer that was made by the bondholders less as a gift and more as a backdoor for creditors associated with the Puerto Rico Electric Power Authority, or Prepa, to take advantage of the disaster by enriching themselves. Offering a desperate population the ability to drown themselves in even more debt is hardly generous.
The Prepa Bondholder Group has offered the island’s utility a $1 billion debtor-in-possession (DIP) loan, and a separate swap of $1 billion in existing bonds for another $850 million DIP note. This money would be immediately available for restoring electric power. In all, the deal includes $150 million in debt cancellation on roughly $9 billion in outstanding Prepa bonds.
But for a better gauge of just how altruistic the offer is, it’s an even worse bid than the creditors made before the storm hit. The overall debt relief is slim; in fact, far less than the 15 percent haircut Prepa bondholders proposed in April. And when you factor in accrued interest and higher-value bonds, Prepa bondholders would likely come out ahead.
The bondholders’ offer comes after President Donald Trump offered one of the most historically grotesque responses to a natural disaster, highlighting Puerto Rico’s debt difficulties:
Texas & Florida are doing great but Puerto Rico, which was already suffering from broken infrastructure & massive debt, is in deep trouble..— Donald J. Trump (@realDonaldTrump) September 26, 2017
...It's old electrical grid, which was in terrible shape, was devastated. Much of the Island was destroyed, with billions of dollars....— Donald J. Trump (@realDonaldTrump) September 26, 2017
Puerto Rico would not have to make interest or principal payments on the $1.85 billion in loans for the next two years, with a rate of Libor plus 4.50 percent after that. (Puerto Rico’s last note sale in 2014 was for Libor plus around 8 percent, so the terms are an improvement.) In addition, Prepa bondholders say the capital will allow Puerto Rico to provide federal matching funds to the Federal Emergency Management Agency, which could qualify the island for up to $9 billion more in grants.
Those grants are certainly important. But to be sure, Prepa bondholders “are not giving away $1.85 billion,” said Adam Levitin, bankruptcy expert and law professor at Georgetown University. “They’re giving a loan [Puerto Rico] will have to pay back. This is not a donation to the Red Cross.”
DIP financing, typically done for bankrupt entities, is considered low-risk because it puts the creditor in a senior position to get paid back in full. By swapping Prepa bonds, which are junior to other forms of Puerto Rican debt, with DIP loans, the bondholders would put themselves in a better position for repayment. They are more valuable bonds to hold. “They cut to the front of the line,” Levitin said.
Plus, opening up additional FEMA grants would boost Prepa as an asset, increasing the value of the remaining bonds.
Of course, any funding, strings or no strings, that makes Puerto Rico more likely to survive two powerful hurricanes would inevitably reward bondholders, by increasing the likelihood of repayment. And the island can certainly use any dollars it can find, though Puerto Rico could likely find plenty of lenders willing to offer such a low-risk DIP financing deal, especially with matching FEMA funds on the horizon, as well as congressional disaster relief a likelihood.
Although leaders across the political spectrum have stressed the need for aid to Puerto Rico, Congress is likely to delay a package until mid-October. The fiscal control board that governs Puerto Rico’s finances, created by 2016 legislation called the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA, has so far allowed only $1 billion to be “reprogrammed” from other parts of the budget. Austerity measures, like planned furloughs and pension cuts, have still not been formally lifted. And since tax revenues are unlikely to be collected for at least a month, cash flow is nearly impossible to come by.
Meanwhile, streets continue to look like rivers. A dam with a large crack caused hurried evacuations. Food and medications are hard to find. Eighty percent of crops are ruined. Neighborhoods have been deemed unsafe as people struggle to survive. “If anyone can hear us, help,” said one of the island’s mayors. Officials have said full restoration of power could take four to six months, and full recovery will likely take years, with damages ranging as high as $30 billion.
In August, one creditor, Aurelius Capital Management, sued to stop Puerto Rico’s bankruptcy-style case, arguing it violates the Constitution. Aurelius, owned by Paul Singer protege Mark Brodsky, has not dropped the lawsuit since the hurricanes hit.
The Prepa Bondholder Group includes mutual fund investors Franklin Templeton and Oppenheimer Funds; insurers Assured Guaranty and National Public Finance Guarantee Corp.; and hedge funds Angelo, Gordon & Co., BlueMountain Capital Management, Knighthead Capital Management, and Marathon Asset Management.
In a statement, Stephen Spencer of Houlihan Lokey, the Prepa Bondholder Group’s financial adviser, said: “Our thoughts are with the people of Puerto Rico and its residents during this difficult time and we hope that this capital commitment will provide bridge financing and matching funds as required by FEMA legislation while supporting the Commonwealth’s recovery.”
Angelo, Gordon & Co. – Member of Prepa Bondholders Group, offered $1.85 billion in DIP loans and $150 million in debt relief
Appaloosa Management – no response
Archview Investment Group – no response
Ambac – no response
Aristeia Capital – no response
Arrowgrass Capital Partners – no response
Assured Guaranty – Member of Prepa Bondholders Group, offered $1.85 billion in DIP loans and $150 million in debt relief
Aurelius Capital Management – no response
Avenue Capital Group – no response
BlueMountain Capital Management – Member of Prepa Bondholders Group, offered $1.85 billion in DIP loans and $150 million in debt relief
Brigage Capital Management – no response
Candlewood Investment Group – no response
Canyon Capital Partners – no response
Carmel Asset Management – no response
Centerbridge Partners – no response
Cyrus Capital Partners – no response
Citibank – Donated $250,000 to the Red Cross.
D.E. Shaw – no response
DoubleLine Capital – no response
Farallon Capital Management – no response
FGIC – no response
Fir Tree Partners – no response
Fortress Investment Group – no response
Franklin Templeton Investment Co. – Member of Prepa Bondholders Group, offered $1.85 billion in DIP loans and $150 million in debt relief
Fundamental Advisors – no response
Golden Tree Asset Management – no response
Goldman Sachs – Gave $500,000 to “organizations assisting in immediate search, clean-up and recovery efforts” in the Caribbean after Hurricane Irma.
Highbridge Capital Management – no response
Knighthead Capital Management – Member of Prepa Bondholders Group, offered $1.85 billion in DIP loans and $150 million in debt relief
Mackay Shields – declined to comment
Maglan Capital – no response
Marathon Asset Management – Member of Prepa Bondholders Group, offered $1.85 billion in DIP loans and $150 million in debt relief
MatlinPatterson Global Advisors – no response
MBIA – no response
Meehan Combs – fund shut down
Merced Capital – no response
Monarch Alternative Capital – no response
Och-Ziff Management – no response
Oppenheimer Funds Co. – Member of Prepa Bondholders Group, offered $1.85 billion in DIP loans and $150 million in debt relief
Perry Capital Management – fund shut down
Principal Global – no response
Redwood Capital Management – no response
Scotiabank – gave $500,000 for Hurricane Irma relief in the Caribbean.
Sound Point Capital Management – no response
Stone Lion Capital Partners – no response
Syncora – no response
Taconic Capital Partners – no response
Tilden Park Capital Management – no response
Vårde Partners – no response
Whitebox Advisors – “We have a policy of not discussing Puerto Rico or any securities in which we are involved.”
Correction: Sept. 27, 2017
An earlier version of this story listed Syncora as a member of the Prepa Bondholder Group. It was not a part of the most recent offer. After press time, a Paulson & Co spokesperson contacted The Intercept to say that the fund had divested its holdings sometime after 2015.
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