Cumberland's Burgess on Puerto Rico Defaulting on Debt (Audio)

of about thirteen billion dollars. We're gonna find out what this means for investors, what it means for elected officials in Puerto Rico and the US, and what it means for the market. We're going to be speaking with Seawan Burgess from Cumberland Advisors. I'm Kathleen Hayes, my co host, Pim Fox is on vacation. And then we're gonna be speaking to a formal legal advisor to former UK Prentis Prime Minister David Cameron. Actually I shouldn't say former, he

hasn't stepped down yet, but he's on his way. We're going to talk about navigating the post regulatory landscape and also what's next for Mr Cameron. Now let's get to Catherine Cowdery. She is in the Bloomberg newsroom with a Bloomberg Business flash. Thank you, Kathleen Will. Consumer focused companies are fueling modest games on Wall Street. The SMP five funded is up for a fourth day in a soundtrack

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naszac Hire by thirteen at forty eight fifty five. And that's a Bloomberg Business flash. This is taking stock with Kathleen Hayes and Pim Fox on Bloomberg Radio. A debt default in slow motion. For months, Puerto Rico has been negotiating with creditors. It's been lobbying the US Congress and the White House to do something to help it avoid default. Help it restructure thirteen billion dollars worth of debt, and actually not all of that debt, but certainly key parts

of it. And here we are today, Puerto Rico is ready to default on about one billion dollars worth of its general obligation bonds. Those are bonds that the Constitution said must be paid before other items. That's why they are in the passing such an ironclad guarantee to investors. But if it's a choice between keeping kids in school, keeping government hospitals open, uh, the President has helped in the Congress now to help Puerto Rico take this step that will keep it in flow it while it resolves

its debt problem. At least that's the hope. Let's talk now to someone who's been following us very closely, Shawn Burge's portfolio manager and analysts for fixed income at Cumberland Advisors, joining us from Sara Sota. So, Sean, this is quite a day for Puerto Rico. Yeah, I love Kathleen, So it's quite a day. A little bit of been following poor to go over the last you know, however long, it's it's been a big day in a big week.

So it's uh, if you're looking at about UM a billion of two billion in debt service due today actually getting paid with the General Obligation UM debt getting shafted for the most part. So it's a bad day if you own uninsured commonwealth debt. What is in the plan now that has been agreed on in Washington for Puerto Rico to move ahead? What must they do? What can they do? What kind of help are they going to get?

We know just from the outline of Premissa, which ended up passing the House and the Senate and being signed off by the President, and you know, very much uh bipartisan support across the board, which was actually kind of a rarity to see nowadays in politics. Um, that was kind of reassuring to see that the federal government here is now going to step in and really provide some clarity and some erection for the commonwealth, because it seemed like, you know, they were just kind of and a boat

afloat with no means to do anything. And what Promiser really does is that establishes a seven member control board which will oversee their budget and they're spending and allow them the ability to restructure some of their debt. And that's really where what is key and this it gives them um the ability to look at their debt and to be able to pay you know, hopefully what they can afford to, and you'll see cuts across the board, but it should hopefully put them in a better position

going forward. And that's why you know, we're pretty optimistic to see this. Well, I'm glad to hear that you're optimistic, because I still in a nutshell when I think of three and a half million people with thirteen billion dollars with a debt, I think, how in the world did investors ever keep buying bonds from Puerto Rico seeing how this was piling up on and what was basically a poor country that was already in bad shape. I mean, where's your optimism? Where it's what's what's doing rating it?

That's it's a very valid point because when you look at it, about half the islands below the poppy line, and you know, investors for decades and and the island itself is at fault as well, because what you know, what they didn't do with that money was really look at improving their infrastructure, their you know, accounting techniques, or they're really any of their internal mechanisms. They just kept borrowing,

and investors for decades just kept wanting the money. You know, it's triple tax exempt, kept putting the funds and and everywhere else, and it offered higher yields and typically what you can find. So, you know, investors just or kind of you know, let's fault here as well. Well. I guess maybe they thought that government would step in as it has. But of course, as you point out, the owners of the general obligation bonds are not getting paid up.

A question from a listener who's a financial advisor and advises his clients to buy various kinds of bonds. Is it true that these bonds are held by hedge funds, in which some are related to New York City teacher pension funds. Uh, well, we know Puerto Rico has held really across the board. Um A large person then is actually held by island residents and and on island banks, large percentages are held by mutual funds. I mean, you can find Puerto Rico to really places that you really

wouldn't think you could. For instance, you know not that not a pull any fund under the mud, but Rochester is fund. Uh, Rochester Fund actually held a large percentage of Puerto Rico and it for a long time and it's really once it really all this came to light with Puertoco, really people start to take a look. But you can find Puerto Rico and you know all kinds of well places and portfolios. So for investors, uh they you're are you do you would you say to people

be aware of the general obligation bonds you buy now? Uh, don't buy Puerto Rico. Are there some deals now in Puerto Rico because they hit bottom and people have hope this will be resolved? What are you what are you buying for your clients? What do you advising clients at Cumberland. Yeah, our our stance has always been to avoid uninsured general uninsured Puerto Rico dead, just because there was so much murderiness and there still is. Um promissa you know, really

clear up the situation. It just provides the map forward. So we still have to see where we're structurings end up, what kind of haircuts certain credits get. So in our view and what we do at Cumberland is we focus on the opportunities and insured Puerto Rico debt, Puerto Rican debt, so We've always maintained that I'm insured that is really carries a high um degree of risk with it, so we've avoided that area of the market and really focus more on the insurers and the opportunities in there. So

that's where our work was really concentrated. Well, thank you so much, Sean. It's a complicated situation, but definitely a landmark, I guess, a milestone for Puerto Rico. Well look forward to having you back as the next phase of Puerto Rico's debt saga, that's the word saga continues. I'm Kathleen Hayes taking sock and this is Bloomberg. This Hampton's Commuter

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