Maglan's Tawil on Puerto Rico: Infrastructure at Risk (Audio)

on taking Stock, a story about Puerto Rico. U S Treasury Secretary Jacob Blue warning that Puerto Rico may need a US government bailout if the Congress doesn't pass a bill that helps the island restructure its debts and prevent a series of cascading defaults. Will investigate right now. Let's go to Catherine Calgary in the Bloomberg newsroom for a

Bloomberg business flash. Thank you, PIM and Bloomberg. Taking Stock has brought to you by Sector Spider e t S. Why buy a single stock when you can invest in the entire sector? Visit Sector spdrs dot com or call one six six Sector e t S. The stock market is clowing back some of the owned at lost last week. The benchmarks are advancing, helped by gains in banks and

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with Kathleen Hayes and Pim Fox on Bloomberg Radio. The Governor of the Commonwealth of Puerto Rico, Alejandro Garcia Pattillo, warned that port Rico bond investors will face a cascade of the faults beginning in July unless the US Congress passes legislation that would facilitate a restructuring of the commonwealth's debt. Well, how likely is that. Let's find out from David Towell. He is the president and the co founder of Magnun Capital. David,

thank you very much. For being with us. So give us an update and and any prognosis you can for this patient that at least today is not paying four two million dollars from the Government Development Bank on interest that is due. Uh. So this is just another i'd say, data point on the timeline here for Puerto Rico. UM it is seemingly a point in time that the Congress

didn't particularly think was so significant. The real um point in time that is at this point absolutely critical is a July one date where roughly two billion dollars of total payments are due, and more importantly of those payments, uh it will be potentially the first payment on general obligations bonds that the Commonwealth could code to default on. Why is it so critical to understand the value or the difference of a general obligation bond and let's say

something from the Commonwealth Development Bank. Oh sure. So, as with the even corporate capital structures, their varying priorities on debt UM and when it comes to a Commonwealth like this one, UM, some bonds or some uh debt is guaranteed by certain revenue streams. In the case of general obligations bonds, they're actually guaranteed by the Constitutional Puerto Rico.

Exactly what that means to the extent that they were default on that and exactly who would be able or which classes of bondholders would be entitled to which revenue streams that the commonwealth produces is actually a question that hasn't been an sard uh. And so therefore, you know, missing a payment on those geo's in July would actually bring the legal issue to a head um and make you know, play out very disastrously uh for the commonwealth itself.

Forget about the bond holders for a second. Uh. You know, the commonwealth itself is under severe or financial stress right now, and the citizens of the island you know, need to get uh you know necessary uh, infrastructure necessary uh and basic you know services provided um, and that will further come under strain, you know, to the extent of the July first payment is well, just to highlight what you said, Governor Padilla, he said that he's going to be focusing

on providing essential services rather than pay creditors. This is so far the biggest to fall. I guess you get attention when it's a billion dollars of a misspayment rather than just FO two million it's not only that, uh, you know, today's bonds um, you know don't allow the creditors uh necessarily to bring the Commonwealth to a halt uh the missed g O payment however, um, you know, if interpreted favorably for those general obligation bondholders, could actually

disallow PADA from redirecting funds. Uh if the geos are successful in a litigation which says under the Commonwealth Constitution that they must be paid well. Frankly, general obligation bondholders may have an entitlement that could be very much higher than you know, the necessary infrastructure of the Commonwealth, or at least, you know, anything beyond the absolutely most bare bones basic needs of the Commonwealth. What about forty seven

cents on the dollar? This, I understand is the agreement or the basis for an agreement by the government Development which defaulted today and some of their hedge funds bond holders. Yeah, there was a news report of regarding that regarding a certain group of bondholders comprising less than of the total

outstanding bonds UM. And it also says that nothing is definite and that they would use the next thirty days, you know, to further discuss and they could obviously, you know, in order to complete restructuring of those GDB bonds, they'd need buy in from the remaining seventy plus percent who

are not currently you know, part of that tentative agreement. Um, it's all well and good, but unfortunately we've we've seen a lot of this in this situation until this point, which is discussions and you know, tentative agreements and understandings around frameworks or you know, proposals being put forward and that hasn't gotten the Commonwealth anywhere. And at this time,

you know, they're running on borrowed time. Uh, there really isn't time left to go ahead and have discussions with a minority of bondholders in the hope that a consensus will be reached. Obviously, there's always the possibility that a broad restructuring could go ahead and be reached and you know, everything will get sewn up pretty quickly. However, you know, history has shown, especially in this case, which is much more than a three ringed circus in wheer go ahead

and orchestrate, that it's quite difficult. And so the likely um, you know, possibility is going to be that the Congress is either going to have to come together with respect to some sort of law that is going to be imposed on the island, or that we're going to get to a messy default here in July. Thank you very much. David's how president co founder Magdalen Capital speaking about Puerto

Rico and it's a debt crisis. If you're listening to taking Stock on Bloomberg Radio, coming up on taking Stock, a new look at fiduciary rules. What do changes in fiduciary rules coming from the Department of Labor mean for your retirement. We've got details