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Muni Credit: The Model of Puerto Rico in the Restructuring of Foxwoods

Muni Credit: The Model of Puerto Rico in the Restructuring of Foxwoods

Posted by Juan Gavasa on April 17, 2014

For buyers of Puerto Rico’s bonds who anticipate a restructuring that would cut debt or delay payments, Connecticut’s Foxwoods Resort Casino may provide a road map to resolution.

Like the island commonwealth, the gambling destination 125 miles (201 kilometers) north of New York City can’t file for bankruptcy protection. The Mashantucket Pequot Tribal Nation, its owner, remained viable by negotiating with investors last year to reduce $2.3 billion of debt almost 25 percent, lowering interest rates and taking longer to pay.

Puerto Rico’s plight is of a different scale, with its $73 billion of debt and 3.6 million residents. Yet the tribe’s experience may be instructive, said Tom Metzold, co-director of munis for Eaton Vance Management, which oversees about $28 billion of state and local debt. The casino had to persuade key players to talk, to find a solution while keeping its doors open and couldn’t resort to courts for protection.

“If you go back to Foxwoods, they were of course a sovereign nation and were not eligible for bankruptcy, yet they were able to get all the various parties around the same table and come to an agreement as to how they were going to restructure the bonds,” Metzhold said.

Who’s In?

Lesson one: Get the players to the table.

Foxwoods, opened in 1992 in southeastern Connecticut, is the largest resort casino in North America. It stopped paying principal and interest in 2009 amid the longest recession since the 1930s and growing competition, particularly from Mohegan Sun, a casino 10 miles west.

Limited reserves and a lack of bond insurance prompted creditors to negotiate, striking a forbearance agreement with the tribe and drafting a solution. Puerto Rico hasn’t reached that point. The commonwealth and its public corporations continue to pay bondholders, partly by borrowing more.

On March 11, it sold $3.5 billion of tax-exempt general obligations maturing July 2035, the biggest sale ever of municipal bonds rated below investment grade, providing cash through July 2015. The bonds, rated BB+ by Standard & Poor’s, traded April 15 with an average yield of 9.35 percent. That’s the highest ever and surpasses the 6.4 percent yield on Greece’s 30-year debt.

Hedging Bets

Governor Alejandro Garcia Padilla, who took office in January 2013, has said he intends to repay bondholders on time and in full. Yet the island’s Government Development Bank, which works on debt transactions, engaged restructuring specialists this year.

Investors since about October have been pricing in a restructuring. Interest rates on Puerto Rico’s shorter maturities exceed those of longer bonds, a sign of a distressed credit. An index of five-year commonwealth debt yields 9.02 percent, 0.57 percentage point more than on 30-year securities, data compiled by Bloomberg show. The difference was as high as 3 percentage points Feb. 19.

“It’s likely that eventually, without some form of legislative relief from Congress, that they’re going to have to restructure,” said Soren Reynertson, managing general partner at GLC Advisors & Co., which represented bondholders in the Foxwoods restructuring.

Barbara Morgan, spokeswoman for the GDB, declined to comment.

Ante Up

Lesson two: The house needs its cut.

Investors couldn’t seize Foxwoods’ property or take equity because of the tribe’s status as a sovereign nation, Reynertson said. Instead, they helped the resort turn around its operations to recoup their investment.

Creditors agreed to lower Foxwoods’ total debt load and cut interest rates, which enabled the gambling facility to invest in the property to attract more visitors and increase revenue, Reynertson said.

“There was an argument that Foxwoods could grow, that it was a temporary situation,” Reynertson said.

Puerto Rico would likewise need to stabilize its economy in concert with a restructuring, said James Spiotto, a municipal bankruptcy specialist in Chicago.

“Puerto Rico needs a recovery plan,” Spiotto said. “You can reduce debt and adjust it, but if you don’t solve the systemic problems, you’re just going to repeat the problem latter on.”

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