Inversionistas WSC Puerto Rico Grecia

8/3/2019 Inversionistas WSC Puerto Rico Grecia

1/6

WASMER, SCHROEDER & COMPANY

INVESTMENT ADVISORS

PuertoRico:

GreeceoftheWest?

November

2011


2/6

PUERTORICO:GREECEOFTHEWEST?

600FifthAvenueSouth,Suite210 Naples,FL34102 [T]239.263.6877 [F]239.263.81462

WASMERSCHROEDER.COM

PUERTORICO:THEGREECEOFTHEWEST?Overthepastyear,municipalcreditqualityhascome

underfirewithanumberofpeople,mostnotably

MeredithWhitney,callingforlargeincreasesin

municipalbonddefaults. As2011hasmarchedon,we

haveactuallyseenfewerdefaultsthan2010with

numbersnotclosetothehundredsofbillionsthat

Whitneyforetoldina60Minutesnewsreport. The

questionremainsthough,Willweseeanuptickindefaultsforvulnerablecredits? Aswehavearticulated

innumerous

pieces

over

the

past

year,

Wasmer,

Schroeder

&

Company

has

not

believed

there

would

be

a

rashofdefaultsinthemunicipalsectorin2011andwemaintainthatoutlook. Wedobelieve,however,that

troubleispotentiallyonthehorizonforonewidelyownedcreditinparticular,anditssimilaritiestomanyof

theweakerEuropeannationsareworthnoting. ThiscreditistheCommonwealthofPuertoRico. Whilewe

donotbelievethatdefaultisimminent,thepotentialdoesexistthatPuertoRicodigsafinancialholesodeep

thatthereremainsnowaytogetout. WhileourseparatelymanagedaccountshavenoexposuretoPuerto

Ricogeneralobligation(GO)bondsoritspubliccorporations(otherthanthosewhichareprerefundedor

escrowedinUSGovernmentsecurities),wedobelievethatthewidespreadownershipofPuertoRicos

bonds,thelargeamountofdebtoutstandinganditshighprofilestatuscouldhavefarreachingimplications

forthemunicipalmarketasawholeifPuertoRicowereexposedtoanyseverefiscalstress.

HISTORYPuertoRico,meaningrichport,wasfirstclaimedbyChristopherColumbusforSpainin1493andforover

400yearswasacolony/territoryofSpain. In1898,duringtheSpanishAmericanWar,PuertoRicowas

invadedbytheUSandwascededtotheUSundertheTreatyofParis. In1917PuertoRicansweremadeUS

citizensandin1947theUSgrantedPuertoRicothepowertoelectitsowngovernor. PuertoRicoisofficially

anunincorporatedterritoryoftheUS. ThismeansthatUSFederallawappliestoPuertoRicodespite

havingnovotingrepresentationinCongress.ThePuertoRicanconstitutiondeclaresthattheyarea

CommonwealthoftheUS. ThisrequirescitizenstopayFederaltaxesincludingSocialSecurityandMedicare

taxes,aswellasimport/exporttaxesandfederalcommoditytaxes. ResidentsofPuertoRicoarenot

residentsofastateortheDistrictofColumbiaandthereforearenotqualifiedtovoteinFederalelections1.

AnothermajordifferencebetweenPuertoRicoandthestatesisthefactthatthepopulacemayvoteto

dissolvetheir

Commonwealth

status,

and

unlike

US

states,

this

vote

would

not

require

the

approval

of

the

US

Congressorstateratificationtodoso. Whilearemoterisk,itisoneuniquetoPuertoRicoandbears

considerationbybondholders. Additionally,andmostimportantlyformunicipalbondinvestors,interest

incomeproducedbyPuertoRicosbondissuesistaxexemptattheFederal,stateandlocallevelinanystate

intheUS,thusmakingthemdesirableforthoselivinginhightaxlocales.

1www.topuertorico.org


3/6



WASMERSCHROEDER.COM

CURRENTECONOMYPuertoRicoseconomyislargelydominatedbythegovernmentandtourismwithmanufacturingandtrade

accountingforsignificantportionsoftheeconomyaswell. PuertoRicohashistoricallybeenapoorterritory

in

relation

to

US

states;

over

44%

2

(compared

to

15%

in

the

US

3

)

of

the

population

lives

below

the

federal

povertyline. Thisrampantpovertyhasalsocontributedtoanextremelyhighcrimeratewith22.54murders

per100,000people,worsethananyUSstate. PuertoRicowasexperiencinganeconomicslowdowneven

beforethe2008financialcrisisoccurredandtheireconomicwoeswereexacerbatedbytheweakdemand

comingfromtheUSandtherestoftheworldintheaftermathof2008.Priortothecurrentgovernors

tenure,fiscaldisciplinewasoftenignoredandlargebudgetdeficitswerethenorm,risingto$3.3billion5in

2009(2001wasthelastyearwithabudgetsurplus). Thevastmajorityofdeficitswerefinancedwith

borrowingasopposedtoaneffortofcuttingcosts,especiallywiththecreationofCOFINAbonds6 which

arebackedbysalestaxrevenuesandeffectivelysubordinateGObondholdersthroughthisnewstructure. As

thetablebelowshows,debthasconsistentlygrownoverthepastseveralyearsbyutilizingnonGOavenues

toraisecapital. Whilethishasallowedlowerborrowingcosts,thepledgingofrevenuestreamsconstrains

budgetflexibilityinthefuture.

ITEM DECEMBER08 DECEMBER09 DECEMBER10 $DIFFERENCE(20102008)

CentralGovernmentTotal 14,228 13,208 12,782 (1,446)

Constitutional 9,006 9,511 9,193 187

TRANSsandTRABs 2,500 900 900 (1,600)

Extraconstitutional 2,721 2,797 2,689 (32)

COFINA(net) 6,306 11,544 14,218 7,912

PublicCorporationsTotal 26,596 27,358 28,195 1,599

PRASA 2,827 3,144 3,473 646

PREPA 6,031 5,858 7,781 1,750

PRHTA 6,344 6,240 6,120 (224)

PRRBA 3,124 3,300 3,324 200

PRIFA 1,853 1,828 1,798 (55)

PRPA

59 56 46

(13)

OtherandDebtswithDGBandPrivate 6,358 6,932 5,653 (705)

Municipalities 2,838 3,139 3,331 493

DebtnotsupportedbyGeneralFund 6,489 5,407 5,358 (1,131)

Debt,GrandTotal 56,455 60,656 63,884 7,429Source:GovernmentDevelopmentBankforPuertoRico

2www.topuertorico.org

3USCensusBureau

4AssociatedPress

5OfficeofManagementandBudget

6COFINAistheSpanishacronymforthePuertoRicoSalesTaxFinancingCorporation,anindependentinstrumentality

oftheGovernmentofPuertoRicocreatedin2006


4/6



WASMERSCHROEDER.COM

TheeconomyofPuertoRicoremainsweakandadropinGross

DomesticProduct(GDP)isexpectedforthecurrentfiscalyear.

Unemployment,despitefallingfromitshighs,isstillatacrippling

15.4%as

of

September

2011

and

the

labor

participation

rate

of

40%

isfarbelowtheUSaverageof64%. Thevalueofconstruction

permitshasfallenapproximately23%yearoveryear,althoughtrade

andtourismhavereboundedwithgrowthof5.2%and17.8%year

overyear,respectively. Mosttroubling,andofgreatimportanceto

thegovernmentsfinances,aretheunfundedpensionliabilitiesof

PuertoRico. Forfiscalyear2010,thetwolargestgovernment

pensionplans,PublicEmployeesandTeachers,werefundedat8.5%

and23.9%,respectively;whereastheaverageUSstatesfunding

ratiois75%. Thegovernmenthasputplansinplacetohelpeasethis

burdenbyconvertingtoadefinedcontributionplan,increasingthe

employer

contribution

rate

every

year

for

the

next

ten

years

and

reducinggovernmentpayrollnumbers. Despitethesechanges,itis

stillestimatedthatthepensionfundswillbecomeinsolventasearly

as2019. Outstandingpublicdebthasincreasedby9%peryearover

thepasttenyears,fargreaterthantheCommonwealthsrateof

growth. Debtservicecostsremainamanageable6.5%of

expendituresbutmuchoftheCommonwealthsdebtisbackend

loaded,puttingagreaterburdenonfuturegenerations.7,8,9

Onthepositiveside,GovernorLuis

Fortuohasmadeitagoaltogetthe

Commonwealthsfiscalhouseinorder.He

hasimplemented

anumber

of

permanent

andtemporarytaxincreases. Hehasalso

cutgovernmentexpensesandpayrollover

thepasttwoyearsby19%and16%,

respectively10. Ahiringfreezeacrossall

agencieshasbeenimplementedasthe

governmentpayrollofPuertoRicois

notoriouslybloatedandaccountsfor

approximately30%ofPuertoRicosentire

payroll. Whilethegovernorexpectsto

achieveabalancedbudgetin2013and

createarainy

day

fund

by

2014,

slower

thanexpectedgrowthand/orpolitical

considerations(includingthefactthat

GovernorFortuoistrailinghismore

liberalchallengerinrecentpolls),could


8BureauofLaborStatistics

9GovernmentDevelopmentBankforPuertoRico


29%

3%

16%

5%

33%

4%5%

4%

PAYROLL EMPLOYMENTSource:GovernmentDevelopmentBankforPuertoRico,asof11/9/2011

Government

Contruction&Mining

Trade

Finance,Insurance&RealEst

Services

Manufacturing DurableGoo

Manufacturing Nondurable

Other

0% 3% 6% 9% 12% 15% 18%

QatarGhana

Mongolia

Eritrea

Ethiopia

China

India

Usbekistan

TimorLeste

Laos

GDPGROWTH FORECSTS,2011

FastestTen

5% 4% 3% 2% 1% 0% 1%

SpainBahamas

Iceland

Italy

Venezuela

Ireland

Barbados

Portugal

Greece

PuertoRico

SlowestTen

Source:TheEconomist


5/6



WASMERSCHROEDER.COM

derailsomeofthefiscalconservatismdemonstratedbythecurrentadministration. Debtburden

continuestoriseanduntilthisbeginstodroportheeconomybeginstogrowfasterthantheriseindebt,

theCommonwealthofPuertoRicoisheadingforapossiblefiscaltippingpoint.

COMPARISONTOTHEPORTUGAL,IRELAND,ITALY,GREECE,SPAIN(PIIGS)

While2008wasallabouttheproblemsintheUSanditsbankingsystem,2011hasbeencharacterizedbythe

EuropeanUnion(EU)anditsbanks. WhiletheEUstruggleswithhowtocreateanorderlydefaultinGreece

andinvestorsremainskepticalastowhetherotherEUnationssuchasItalyandSpainwillbeabletoescape

massivedebtrepudiation,weseesimilaritiesbetweentheseweakEUcountriesandPuertoRico. Asthetable

belowillustrates,PuertoRicoseconomicanddebtstatisticsarefarmoregrimthanthemostleveragedstates

intheUSbutareapproachinglevelsseeninthePIIGS.

Debtto

GDP/GSP

DebtPer

Capita

Unemployment

Rate(%)

PerCapita

Income

Debtto

IncomeRatio

PuertoRico* 31% $7,837 15.40% $13,675 57.3%

Massachusetts

8%

$4,606

7.30%

$51,302

9.0%

Hawaii 8% $3,996 6.40% $41,661 9.6%

Connecticut 8% $4,859 8.90% $54,877 8.8%

NewJersey 7% $3,669 9.20% $51,167 7.2%

Greece 166% $34,103 12.60% $27,360 124.6%

Portugal 106% $16,402 11.00% $24,710 66.4%

Ireland 109% $35,122 13.70% $32,740 107.3%

Italy 121% $38,025 8.40% $31,090 122.3%

Spain 67% $17,539 20.10% $31,550 55.6%

*DoesnotincludePublicCorporationswhichhaveanadditional$28blnindebt

Sources:DeutscheBank,StateofConnecticutGeneralAssembly,BureauofLaborStatistics,BureauofBusiness&EconomicResearchattheUniversityofNewMexico,EuropeanCommission,TheEconomist,WorldBank

Structurally,PuertoRicohasmanysimilaritiestotheseEuropeannationsincluding,butnotlimitedto,a

bloatedgovernmentworkforce,largeunfundedpensions,extremelyhighunemploymentrates,largedebt

levelsasapercentageofincomeorGDP,andweaktaxcollections. Whilenoneofthesemetricsisatthe

pointtolimitPuertoRicosabilitytoborrowinthefinancialmarkets,thepossibilityexiststhattheircurrent

trajectorycouldleadtoacrisisofEuropeanproportions. Continuedgovernmentjobcutswhicharenot

offsetbyprivatepayrollgrowthandreducedbenefitscouldleadtounrestsimilartowhathasbeenseenin

Europe. ProceedsofPuertoRicosborrowingarebeingusedtopaypreviousdebtsasopposedtobuilding

infrastructureorcreatingeconomicgrowth. Ofthecloseto$8billioninCOFINAborrowingsin200910,94%

wasutilizedtopayexistingdebtsanddealwithdeficits.MunicipalborrowinginPuertoRicoiscloseto$64

billionasof2010. WhilenotallisdirectlytiedtothegovernmentofPuertoRico,thevastmajorityofthis

debthas

some

connection.

Based

on

this

metric,

debt

per

capita

is

awhopping

$17,265

which

is

more

than

thatofPortugal,closetothatofSpain,andwellabovePuertoRicoslowpercapitaincome11.

Despitehavingafiscallyconservativegovernor,thehistoryofPuertoRicoisonelitteredwithcronyismand

irresponsiblefiscalchoices. Furthermore,PuertoRicoremainsanextremelyimpoverishedterritoryand

growthprospectsremaindim. WhilethesimilaritiesbetweenthePIIGSandPuertoRicoareglaring,itis

importanttonotethatimportantdifferencesdoexist,mostnotablythefactthatthebankingsystemin

PuertoRicoisnotthreatenedatthecurrenttime. ManyUSbankshaveoperationsinPuertoRicoandthe

11GovernmentDevelopmentBankforPuertoRico


6/6



WASMERSCHROEDER.COM

GovernmentDevelopmentBankcontinuestoexpanditsbalancesheetandmanageliabilitiesreasonablywell.

Also,atleastcurrently,thereisnodesireamonginvestorstoshedPuertoRicodebtandtheirupcomingdebt

maturitiesremainmanageablewithouttheballoontypepaymentsweseeinmanyEuropeannationsand

someareasofthecorporatebondmarket. Stillthetrajectoryremainstroubling;ifPuertoRicosfiscal

problemsarenotaggressivelydealtwithbytheendofthecurrentdecade,themunicipalmarketcouldbe

facedwithasignificantcredithurdle.

CONCLUSIONManyinvestorsarecomfortableholdingPuertoRicodebtdespitetheirlowratings(whicharemostlyinthe

BBBandAcategories)becauseofthebeliefthatiftheygotintoseverefiscaltroubletheUSCongressmay

bailthemout. AsaCommonwealththeyhavenoaccesstomunicipalbankruptcyandthereisnoimplicitor

explicitguaranteeofthedebtbytheUSgovernment. DoesthismeanthatCongresswouldnotcometotheir

aid? Notnecessarily,butinanincreasinglycontentiouspoliticalenvironmentwithfiscalconservatism

runningrampant,theoddsofabailoutseemfarlesslikelythanafewyearsago.Additionally,aswehave

seenwithJeffersonCounty,ALandHarrisburg,PA,localpoliticscanplayanimportantroleinthewillingness

ofgovernments

to

pay.

PuertoRicosgrowingdebtburdenandpensionliabilitiesmaybecomesolargethatnoactionbesides

restructuringcanbetakentoresolvetheirfiscalissues. WehopethatPuertoRicocontinuesonitspathto

fiscalresponsibilitybutarekeenlyawareoftherisks,botheconomicallyandpolitically,toPuertoRicobonds

andtheircreditratingsifthingsdonotimprovemateriallyandquickly.

Disclaimer:Thematerialprovidedisforinformationalpurposesonlyandcontainsnoinvestmentadviceorrecommendationstobuyorsellany

specificsecurities.ThestatementscontainedhereinarebasedupontheopinionsofWasmer,Schroeder&Company,Inc.(WSC),thedata

availableatthetimeofthepresentationwhichmaybesubjecttochangedependingoncurrentmarketconditions. Thispresentationdoesnot

purporttobeacompleteoverviewofthetopicstated,norisitintendedtobeacompletediscussionoranalysisofthetopicorsecurities

discussed. Allopinionsandviewsconstituteourjudgmentsasofthedateofwritingandaresubjecttochangeatanytimewithoutnotice.WSC

doesnotacceptanyliabilityforanylossordamagearisingoutoftheuseofalloranypartofthispresentation.Thisreportshouldnotbe

regardedbyrecipientsasasubstitutefortheexerciseoftheirownjudgmentandmaycontainnumerousassumptions.Differentassumptions

couldresultinmateriallydifferentoutcomes. PleasecontactWasmer,Schroeder&Companyformorecompleteinformation,includingthe

implicationsandappropriatenessofthestrategyorsecuritiesdiscussedhereinforanyparticularportfolioorclient.

AbouttheFirm:Wasmer,Schroeder&Company,Inc.(WSC)isanindependentandemployeeownedFloridaSCorp. WSCwasincorporatedin

1987andregisteredasaninvestmentadvisoronJuly29,1988withtheU.S.SecuritiesandExchangeCommission. TheFirmscorporate

headquartersareinNaples,Florida,wherethetaxexemptPortfolioManagementteam,ClientServices,Operations,IT,Accounting,Compliance,

MarketingandAdministrationreside;ourtaxablePortfolioManagement teamislocatedinCleveland, Ohio;andClientRelationshipofficesin

Exton(Philadelphiaarea),PennsylvaniaandLakeOswego(Portlandarea),Oregon.Specializinginfixedincomeseparateaccountportfolio

management forhighnetworthindividuals,wealthmanagement groupsandinstitutions,includingfoundations,endowmentsandretirement

plans,WSChas$4.02billioninassetsundermanagement,asof09/30/11. TheFirmworkswithclientsandtheiradvisorstoprovidetaxableand

taxexemptfixedincomeportfoliosolutionstomeettheirneeds.

Inversionistas WSC Puerto Rico Grecia

Documents

Transcript of Inversionistas WSC Puerto Rico Grecia