Puerto Rico has a new quandary to deal with. Its recent slip in financial footing has brought about new attempts to begin to find ways to ameliorate its effects. Currently the U.S. territory have the ability to incur $3 billion in new debt. This aims to create money to stimulate them in the long run despite its initial negative impact. They want to invest in Puerto Rico’s future and have the budget balanced by 2015.
Recently the three main rating agencies downgraded general-obligation bonds down to junk levels. Signs of encouragement coming from the commonwealth were mentioned when they disseminated that it wanted to fuel economic growth to be able to pay off bond debts without incidence. Currently under law, Puerto Rico cannot file for bankruptcy as a result of being a U.S. territory but has promised investors a “full faith and credit pledge” outlining the primacy of payment to general-obligation debt.
The plan outlines to incur more debt through general-obligation bonds to refinance current debt owed to Barclays and interest rate swaps in the amount of $330 million and $245 million respectively. This borrowing would come about on June 30 and would be the very last attempt this year to borrow money. The debt would come at a 10 percent interest rate and possibly up to 20 percent for heavy investors albeit investors are wondering how much Puerto Rico can actually borrow.
Despite this, there is a high demand for these high risk bonds and investors seeking higher returns will bring their money in. This is the typical effect when interest rates rise in a country fueled by more risk, yet investors seem confident that Puerto Rico will not default on these. Additionally these bonds will be tax-exempt in all 50 states. This tax provision has generated large amounts of demand for these bonds as well and overall confidence in the commonwealth remains high.
Will there be sunnier days in the future for Puerto Rico and its growth? We shall see how overall growth plays out in the near future.