With a new law in place designed to help Puerto Rico regain its financial footing, the next important move bond investors will be watching for is the formation of a seven-member federal oversight board.
Under the recently enacted “Puerto Rico Oversight, Management and Economic Stability Act,” the president must appoint, by September, six members from a list submitted by Congressional leaders and a seventh at his sole discretion.
The board will designate one of its members as chairman.
Puerto Rico’s governor will be an ex officio member without voting rights.
The board’s role will be to manage the commonwealth’s $73 billion debt and oversee its budget plans.
Puerto Rico bond non-payment widely expected
As expected, Puerto Rico failed to pay $2 billion in loans on July 1, including about $800,000 of constitutionally backed general obligation debt.
However, about $256 million due on sales-tax debt in August has already been deposited with the trustee for payment to bondholders.
The July 1 non-payment was widely anticipated and seen by most market participants as a non event. In the aftermath, Puerto Rico bonds held steady and even nudged up a bit in price.
Many insured general obligation bonds continued to trade above par.
Analysts don’t foresee liquidity issues for the major insurers covering payments on Puerto Rico debt, and PROMESA may actually help insurers avoid significant losses, they said.
Wait-and-see on Puerto Rico oversight board
For now, it’s wait-and-see for investors.
In a bid for more time to work through its issues, PROMESA puts creditor lawsuits for missed payments on hold until at least six months after the oversight board is formed.
Also under the law, creditors are prohibited from asking a court to force bond payments to be made ahead of essential services, which Treasury Secretary Jack Lew said would’ve exacerbated the commonwealth’s debt problems.
Creditors are challenging both provisions in court.
Negotiations between Puerto Rico’s government and creditors over restructuring its debt have been ongoing for months, to no avail.
Late last year, Speaker Paul Ryan directed House leaders to come up with a plan to address Puerto Rico’s debt problems by March.
A key U.S. House committee finally broke the logjam and approved a bill in late May.
It passed by large margins in the House and Senate, and President Obama signed PROMESA into law last week.