U.S. Markets closed

Puerto Rico GO bonds up on federal healthcare aid as debt deadline looms

(Adds restructuring proposal by Franklin and Oppenheimer; adds quotes from governor; updates results of protests)

By Karen Pierog and Daniel Bases

CHICAGO, May 1 (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.

On Monday, a creditor group led by mutual funds Franklin Advisers and OppenheimerFunds said it had offered a separate restructuring proposal late last month to save $15 billion in debt service relief, but that it was ignored by Puerto Rico's government.

Without a last-minute 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.

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.

The in-court option, known as Title III, is a provision of the 2016 federal rescue law known as PROMESA.

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 commonwealth's offer was "not even close to a good proposal."

In a statement on Monday, Stephen Spencer, a financial adviser to the group led by Franklin and Oppenheimer, said it offered two restructuring deals. One would have saved $15 billion in overall debt service relief. The other was specific to sales tax-backed debt, known as COFINA debt, and would have saved $4.2 billion in debt service for that particular credit.

The proposals "were essentially ignored," Spencer said.

A representative for Governor Ricardo Rossello could not be immediately reached on Monday.

Ramon Rosario, Rossello's public affairs secretary, told reporters that the government is still considering filing for Title III bankruptcy. “If creditors remain intransigent, we will go to Title III in defense of Puerto Rico’s people,” he said.

Ultimately, the decision of whether and when to file a Title III bankruptcy belongs to Puerto Rico's federal financial oversight board, not the governor, though both sides have said they hoped to work cooperatively.


The spread of 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.

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

There would also be cuts in fringe benefits to some public employees, reduced subsidies to municipalities and the University of Puerto Rico, and reduced benefits to pensioners.

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

There were some scuffles with police and seven arrests, according to reports from Rossello's office.

Speaking to reporters Monday evening, Rossello said organizers of the protest “lost control of the situation," and that police "had orders to intervene."

"There is no justification for today's incidents," he said. (Reporting by Daniel Bases and Karen Pierog in Chicago; Additional reporting by a contributor in San Juan; Editing by Leslie Adler)