The hedge funds that constitute a large portion of Puerto Rico municipal bond holders are signaling initial acceptance for a restructuring of the island's debts. Last week, The New York Times reported the following:
... the exchange would involve rolling up most of the island's current debt and restructuring it into a new "superbond," according to people briefed on the plan. As part of that new bond, general obligation holders would have the first claim on government revenues, giving them the highest priority in the superbond structure. Holders of other forms of the government's debt would have lower priority.
General Obligation Bonds Drink Your Milkshake
General Obligation bonds were always going to come out ahead in any restructuring because they are constitutionally protected and they have first claim on many of the revenue streams that support various Puerto Rico agencies.
Most noteable are the Highway Transportation Authority bonds, of which there are roughly $6.5B outstanding. Infrastructure Funding revenues are also pledged to support GOs.
It is not clear if the superbond structure would broaden these claims to other agency revenues not currently pledged to support Commonwealth GOs. However, don't be surprised if additional straws appear.
Puerto Rico CDO
In effect, the superbond debt restructuring would create a Puerto Rico CDO with GO bonds as the super senior tranche, and many equity tranches (all named after various Puerto Rico agencies). It could look something like the chart below.
Chart 1: Potential Puerto Rico "Superbond" CDO Structure
For a higher resolution version of this chart, click here.
For information about securities expert Jack Duval, click here.
For my previous coverage of the Puerto Rico municipal bond crisis, see this.