Puerto Rico Emergency Funds Are Protected: Rossello (Podcast)

well as in its attempt to restructure it's dead. I am very pleased to say that we have with US Governor card Rosseo. He is the twelfth governor of Puerto Rico and he joins us from our nitedal and studios in Washington, d C. Governor, I'm just wondering whether you have some particular item that you are hoping to hear from President Trump to night at the State of the Union. Well, there's uh, there's many items I would be very much

interested in hearing. But I would say that from our vintage point, making sure that the recovery process in Puerto ric and elsewhere in the nation. UH is one of the priorities that we can focus on getting the funding to the places that have a need to rebuild UH and to recover. And I I think that is UH important to state that that is a priority and funds that are destined to those jurisdictions are not going to be utilized to say, build a wall. I think it's

a it's an important outcome. So, Governor, how much has Puerto Rico received in UH A recovery funding funder federal government? And compare that to what you had hoped for at this stage? Are you sure? I'm guess you're gonna say you're short and there's a deficit. Just give us a sense of the scale, yep. So, So to give you a sense of the scale, we've been working with FEMA and other stakeholders on what the transformation and rebuild plans

should be for Puerto Rico. The estimated cost at this juncture is it's a hundred and thirty nine billion dollars UH. Last year, UH, we've we've received probably from FEMA UH anywhere from three to three and a half billion dollars. And our expectation, of course is is to get that pumped much higher. UM we UH. There there are some reasons why this process has been slow, and it's because it's different in Puerto Rico than in other jurisdictions in

the United States. For example, in Florida or Texas or any other state, the state controls the disimbursement process, whereas in Puerto Rico, FEMA controls it. And you might ask, well, what would be that outcome? Well, a comparison should should

highlight what the order of magnitude differences. UH. Take Katrina when uh it impacted Louisiana by the same time after the hurricane UH that that we're measuring against Maria passing through Puerto Rico, they had already UH nine thousand, five hundred projects that were being moved forward, whereas in Puerto

Rico we only have forty four. So there you can sort of sense a scale of the magnitude difference of what where we should be now in the recovery and UH our sense for petitioning that these restraints UH that are pre placed in Puerto Rico should be should be taken away. You you you started off saying that you want to see what President Trump has planned with respect to potentially diverting money away from Puerto Rico among other

places to pay for the wall. What recourse would you potentially have if he goes ahead and does that, which is what he's threatened to do. So, so this is interesting. I've about four months ago. UH. You know, my job as governors is not only to act but also to anticipate, and UH I had a sense that this might be a discussion where funding for recovery would be utilized to build a wall. So we prepared our team, UH and we started studying all of the legal avenues that we have,

and we have a very robust case. I mean some of the moneys that are coming to Puerto Rico, UH, the commu Unity Development blog rents that are used to uh TO for disaster relief. Those were passed by Congress and they were signed by the president. So UH, those are statute right now and we feel very comfortably confident that those moneys have to go to Puerto Rico. So if there was any dipping there, um, we would certainly

battle it. So for most of the money's we have a strategy forward and of course we hope we don't have to get there. We hope that the president would see that. You know, rebuilding U s citizens lives is a priority. But if it gets to that point, we are ready to battle. So covernor let's talk about the rebuilding process in Puerto Rico. I'm sure you have a

priority list. Give us a sense of given where you are right now, you know, a year plus removed from the hurricane, you know what are the t one of you know the one or two or three critical things that Puerto Ricans need right now to be addressed. I think in terms of projects, I would say the energy

grid UH is a top priority. We have a very weak old energy grid that uses UH expensive fossil fuel, and our objective is to use recovery funding and private partners to leverage that and rebuild a modern energy grid that's more cost effective and that it is better for the environment and that frankly, can be a model towards the future. I think we're building roads in Puerto Rico and infrastructure is UH fundamental, fundamentally critical for our economy

moving forward. And the other part is addressing our our labor force and the labor participation rate. UH. You know, with these recovery funds that are coming to Puerto Rico, with the incentives that are very competitive that we have on the island, with the opportunity zones that will bring about many investment opportunities to to the island, I think we have a window of opportunity to enhance and grow that labor participation rate. Governor I meanwhile made all of

the talk with President Trump. Meanwhile, Bankruptcy Court has approved a planned restructure some of the seventy four billion dollars of debt that the island has UH sales tax bonds are rallying on this news. It has been this is this accounts for about seventeen billion dollars of bonds and basically they were on according to my understanding, the sales tax collected by the state would be split between the

bond holders and the state. How can you be sure that you'll get enough revenues to be able to engage in some of these projects without just the benevolence of Washington, d C. Right, So, so you know, the rebuild of Puerto Rico has many UH many faces. One is on the fiscal front, one is on the economic front, and of course now the Humanian, Humanitarian and Structural Fund UH.

Once we devised. This is based on a fiscal plan that has been devised where implementing certain structural changes would allow us to get avings in government while at the same time enhance our our revenues because our economy is moving forward. We've implemented UH labor reform in Puerto Rico, We've implemented permits reform in Puerto Rico, tax reform UH, as well as other critical structural changes that we feel are going to help us enhance and UH Puerto Rico

UH moving forward. So with with all of those components inline, UH, we we see a path that once we clear away restructuring of the debt, with the expected surplus or part of the expected surplus that there is, we're gonna have a nice runway forward to increase our economy and to add significant value. Look, we're betting on nascent markets UM, We're betting on medical cannabis in Puerto Rico. We're betting on cryptocurrency and UM and blood chain in Puerto Rico.

We are betting on HEMP as a as an open market E gaming, sports booking. All of those are markets that are not readily available now in Puerto rican that we're pushing forward. So combined with a lot of the things that we have going on in our island, it's gonna be an exciting time moving forward if we get these debt process of governors. Thank you so much for joining us and sharing your valuable time. Governor Ricardo ros Yo, Governor of Puerto Rico, from the Bloomberg Studios in Washington,

d C, Puerto Rico. We were just talking to the Governor Ricardo Rosseo about the situation on the island with respect to its seventy four billion dollars in debt. We do have an agreement with at least seventeen billion dollars of sales tax bonds joining us here in our Bloomberg Atta Active Brokers studios. Michelle Kaski, Puerto Rico, reporter for Bloomberg News, as well as Dan Salander, partner and director.

I was also head of municipal bonds at Lord Abbott UH normally in Jersey City, but he joins us here in New York. Michell, I want to start with you. There was an agreement reached and signed off on in bankruptcy court. What was it yesterday? The bankruptcy judge she approved this deal. It's it's the biggest deal so far throughout this Puerto Rico bankruptcy process. And right now Puerto Rico has about more than seventeen billion of sales tax bonds.

This deal will cut that down to about twelve billion, and over the life of the debt, the government is saying that they're going to save seventeen point five billion in debt service savings. So, Dan, this is I guess we could characterize this as a very good and very welcome first step. Where do we go from here? Where does the Puerto Rico credit market go from here? In your opinion? Sure, Well, you know it's a very interesting stage. You know, if you if you thought about where we

would be a couple of years ago. To reach the stage is taking a lot to get here. It's a very positive step that we have in agreement, um, but there is a lot more to do from here. You know. One of the big things in this whole process has been to figure out who gets a sales tax money. That's been the big first step. Now that that's been

agreed upon and we have a deal. Once we get this finished, then the general Gation, shareholders and all the difference constituents there need to figure out how to divide up their sales tax and their money. So that's the

next step that we'll see soon. Well, but Dan, just to follow up there, another question is how feasible will Porto Rico's capital structure be once it emerges from bankruptcy, and if it's splitting the sales tax revenue between bond holders uh and itself and its operations, how feasible is that with a shrinking population. Sure, the Portricos I was not a booming economy, but they're doing much better than

people realize. Uh. You know that the revenue is this year away hundreds of millions, six hundred millions, something ahead of the forecast population drop and nowhere near what was expected. So things are doing much better than people might have expected. So there, and they're getting a lot of money from the federal government, so this helps them. It reduces their debt.

Some of these bonds are zero coupons and don't want to pay interest or press went for a long time, so they're putting themselves in a good state to turn things around and really move towards the future. So, Michelle, how good is this agreement for bond holders? What do you think the recoveries will be for them. Um. Some people think that bond holders did very very well on this deal. The there's two types of the Cofeinea bonds. There's a senior tronch and a junior tron such subordinate.

The seniors will get cents on the dollar subordinate fifty six cents on the dollar, and the bonds in the secondary have been trading um close to that. They're getting closer to that um and they've rallied in the past couple of days. The m so cents on the dollar is pretty good for seniors, all right, So Dan, would you be buying more Puerto Rico debt here? It's it's tough at this stage to say whether whether to buy or so. I think we've all been through a lot

getting to this point. What's gonna be interesting is when the sales Tex deal comes to gets to agreed upon and issued, they're gonna be a lot of buyers out there didn't known Puerto Rico through this, so they're gonna have to make that decision. We would get the new bonds of what to do, Yeah, well, is it a

net positive for you or not negative? That a lot of traditional mutual fund holders have gotten back into Puerto Rico debt, so we're at a traditional say through this time, UM, and when they're getting back in right now, they're getting back in through accrack and sewer bonds, things like that that are paying and have never been in default. I think it could be a big positive for us when

this deal comes gets restructure. We have new bonds they're gonna want to buy and uh, you know, they're gonna be interest paying bonds in Puerto Rico that they don't know, and so it could be a good thing for us. So Michelle, well, this has been a fairly long process. I'm sure if you're a bond holder, a very long process. What do you think our next steps here as this as Puerto rican continues to try to get out from

this financial crisis. Yeah, it's definitely important. Like Dan was mentioning earlier, it's important that Puerto Rico keeps on with this and Rick structures the general obligation debt so there can be some resolution to that, and then there will be some smaller portions of debt that they'll still need to work on. UM. And also the issue too of their their unfunded pension liabilities as those are a big

issue for the island. Also the question of management, Dan, what's your confidence right now in the management of the island. The ability to take the money that they're receiving from the federal government and use it in an efficient way. Well, that's something they have to watch carefully. Obviously, the management got them in this situation originally, and that's why we've been working through this for so many years. The federal

r government has been giving them money. It's not all been distributed to them yet, so we have to see what they do with that money when they get it. So much do you have a sense of how much. I saw some number like maybe sixty seventy eight billion dollars of potentially they can get from the government in different ways. So there is a lot of money going to them. And we had the governor on just earlier and he said quite emphatically that he's going to get

that money. They they they've they've been granted it, so a lot of it has been already given to them, or at least the expectations been given to them, and they've been planning for us. It would be very difficult for them if they didn't get what was to they begetting. So from the bond market perspective, how does the bond market view Puerto Rico now? I mean, you know, at some point they're gonna have to come back to the market. At some point they're going to have to you know,

refinance and and continue to invest. How do you think they're gonna be received? That's the big challenge. I mean, coming out of this, they're gonna have to do much better. I mean one of the issues we've had over time as they have not had audited state financials on time, they have not presented information shows they need to bottles that need to provide. So coming out of this, they're gonna be on watch. I mean, they're gonna have to do things much better than they did before to get

the confidence in the market. And until they do, if they want to borrow, the rates are going to be very, very high compared to other similarly rated credits. So it's something to watch. They it's hard. You know, everyone's gonna remember this for a long period of time. We have long memories. Dan Salinder, congratulations on being in the bonds through this rocky period because the prices have way more than double. Depending on what we're looking at, when you

look at the Cofinea bonds. Dan Salinder is partner and director as well as head of Municipal Bonds at Lord Abbott in Jersey City. Michelle Kaski's Puerto Rico reporter, dutifully covering all things having to do with the saga as it drags out over the years. Uh. For us here at Bloomberg News, well, it's been a widely held story and news that the newspaper business has been in a

secular decline for twenty to thirty years. No news, no surprise there, but what we've seen over the last several years as a growth of digital media companies, digital news companies such as Vice and BuzzFeed and huff Posts. But even it looks like they are facing their day of reckoning. We'll dig in a little bit there. So help us dive into those details is Build. Drewelry Bills, a founding partner of Pursuit Advisory based here in New York City.

He joins us in our Bloomberg eleven three oh Studios builds a longtime investment banker and research channels following the media sector. So so build these companies the vices of the world, these digital news companies. They were getting big valuations, attracting a lot of money, and I think they were perceived maybe as the future of news, maybe replace the newspapers. What's going on on that space? Well, interesting, interesting times for everybody in the media sector right now, Paul, I

think that you're correct. In the last five or six years, there was a new sort of wave of of darling companies Fist being one of them, BuzzFeed, Vox, etcetera, that really rose up and and competed in the in the digital arena in terms of news content and general entertainment content. They were experiencing very rapid revenue growth and market share and as a result were accorded major valuations with a lot of investment from old line media strategics like NBC.

Universal invested in both BuzzFeed and Fox in the summer at billion dollar valuations, and Disney invested in Vice twice and at the last round that Disney invested it was over four billion dollars. And they also formed a joint venture with Ice uh taking one of their A and

E cable networks and converting it into Viceland. So it was the new media entering the arena to the old traditional media, but they were getting valuations that were based on revenue multiples and not the traditional cash flow metrics. And over the last two years, I think that what we've seen is a lot of these companies now start to see growth rates recede and and not being able to reach profitability with you know, aggressive investment and not a lot of cost management, and as a result, all

of a sudden, they're starting to hit the wall. Okay, so how much is this bad management on the part of these uh, these media companies, these digital media companies or imprudent management And how much is this some sort of shift in the news business towards say the facebooks

of the world and the apples of the world. Yeah, well two questions there, and I think that on the on the first one, you know, it's just a classic case of of companies that are getting high valuations and a lot of inflows of investment capital and then rapidly deploying that to go after revenue growth with no real fundamental cost management attached to it. We've seen this for multiple cycles over the last twenty years with the rise

of digital. Every cycle has been marked by companies unable to reach profitability and and the third time around it's the same story. So I think that, you know, it's it's very classic in that regard. On the other side, I think that you know, you've seen this this this rise of these new digital platforms up and they produce excellent news content, but they can't monetize it because Google, Facebook, and to some degree now Amazon have basically just sucked

all the oxygen out of the market. They are growing and basically taking over a hundred percent share of incremental opportunity, and there's nothing left for the next generation. It's unique in that regard. So that sounds is like, you know, if you think about the profit challenges that you talked about, you think about the competitive landscape, this looks like an

environment that might be right for some consolidation. Do you think that we will see some of these companies merged to try to get some scale to compete against spoken like a true banker, like a true banker opportunity. Absolutely, I think that I think that it's it's going to

be inevitable, and probably sooner rather than later. Paul. Part of the question is going to be how many of these companies can even really survive just in the last twelve to eighteen months, we've seen several companies go bankrupt.

DeFi Media is one good example, a company that had over a hundred million of dollars of revenue just year before last major investment from UM, large complexes like Wellington and shareholders like Viacom, lions Gate and zell Nick Media, and the company basically just went out of business in the last six months exited UM and And we've also seen several other smaller companies that had strategic shareholders sell for valuations far less than where they last raised capital.

So it's inevitable that they have to consolidate. The question is who can survive through that? So content is king, but only if it's content on Apple, Amazon, or Google. I think that I think that's a good point. It is virtually impossible to build scale now in this market, revenue scale with a real profit margin attached to it, and compete against the three or four behemoths. Interesting times

it is I have to wonder it is. It is fascinating because I have to wonder what the competition will end up looking like, what conglomerate of some of these online media sources will look like. Because they were successful. It's not. You know, it's been of throwing the baby out with about bathwaters and I'll tell you and builds a long time new newspaper animals. I'll tell you where the whole is that the digital world has not filled,

and that is local news. We've got national, global news, but we have no local news and that is a problem. And whoever can figure about that model, I think we'll have a real opportunity. Bill Drewy, if you're listening, you are listening. Paul is giving some We'll have to have you back and you'll have to weigh in on the local news. Bill Drewery, founding partner of Pursuit Advisors in New York, joining us here in our Bloomberg Interactive Broker Studios.

The Fed is patient and investors you that is all clear to dive back into risk, fueling one of the best rallies on record for it certainly high old bonds to start the year. Joining us now is Tom Kennedy, had a fixed income strategy at JP Morgan Private Bank, which has assets of more than five hundred billion dollars. Tom worked at the New York Fed for nearly a decade. Knows how the Fed thanks so Tom what does the FED mean when they say they are going to be

patient with raising rates? Yeah, I think the I think the markets interpreting it the right way. Least they're giving the Feds giving us a runway for risk. We're are gonna have to ask ourselves how long is that runway? But that word patient means something to them. They've only used it in the fform C statement a handful of times in history. That's parsing language. Oh yeah, but that's what watchers do. But so, so, how long is this runway?

I think the runway is at least three months. I think the Fed is promising us that for at least three months, we're not going to do anything. I think that word patient actually does mean too, that they're going to expect to hike again. But they're gonna see how the world evolves over those coming three months to make a decision what their next move is. And I took those words very carefully. I want to see how the world evolves. I think Powell has been telling us data

dependence is the most important piece. Financial conditions and how those evolves are just as important. Alright, So a three month runway is relatively short runway from my perspective, So do I take that three months to not get too far in my skis, but maybe to maybe improve the quality of my portfolio. Is that should be preparing for or what's beyond that runway? Yeah? I think that's the right question, and I think that the answer to that

question is different for everyone. If you have been um insulating your portfolio for the last six state months, adding things that should perform well in a down economy, then I think you should take advantage of this risk one runway and add a little bit of of of beta or risk back to a portfolio. However, if you have not been insulating your portfolio, use some of this rally to do so. Is it too late to get the

upside of this rally? No? I don't think so. I think you what you need to do is look for things that have lagged year to date, and those those are maybe trades that have liquidity dynamics that are not especially attractive, like what what are you talking about? Um, we can find such things in high yield, we can find things in the preferred space. Looking for things that year to date have lagged the broader ind to see rallies.

That's what we're focusing right now because that's where we should see price appreciation in this short quote unquote runway for risk. Was there anything in the jobs report last Friday that calls you are more importantly, calls the Fed to maybe rethink their doublish view. I think they're They've been telling us they're gonna follow inflation as closely as possible. UM. In there, there's nothing that jumped out to me, and inflation is going to run away from them. I think

we're still seeing the steady gradual increases in inflation. UM. Powell's focusing very much on what the inflation universe is going to tell him to do. I don't think that's that's a myopic view of what the world will look like for the Fed. The financial conditions component is going to be just as important to decide what is next

rate hike, which I believe versus a rate cut. Basically, if the markets rallied too much and people get too excited about risk, the Fed hikes and puts an end to the party here in the end, absolutely, I think that's right, all right. So given that dynamic, how important is liquidity at this point? Liquidity is um I think in the investment universe is often only thought of as cash. Cash provides you liquidity, but there is in the investment spectrum.

You can think of this as callously as on the run or off the run bonds, things that are actively traded or not. We're trying to find ways to actively add liquidity beyond just cash, because if we think the FED is closer to the end of the cycle and cuts are coming, cash is going to be a quote unquote underperformer. The return will go down. I want to add liquidity so people have flexibility in a in a

down draft economy. So are you talking about e T f s derivatives or just bonds that are traded very frequently because of the e T rate? I mean we can we can take this this conversation for an hour and talk about market structure of what liquidity really is. You can do that in single name bonds, you can

do that in in passive versus active investing strategies. Um, the places where I think you're going to find the most liquidity are in names that are actively traded by primary dealers, and the passive investing universe is going to see some mark to market moves that don't make a lot of economic sense to them because you're seeing force selling and force buying in those products. Just in this

is a little bit off the FED speak. You talk about finding liquidity, that's a theme that LEAs and I've been hearing about from you know a lot of market participants saying it's hard to find liquidity in the marketplace. How how did your clients trade, How did they feel the trading market is and how do you where do you tell them to go to find that liquidity and yet still find some value that I think the reason it's coming up so much now is because December was

a really challenging time for liquidity. The inability to offload risk in some instances and in some products, whether it be a floating rate product or in the preferred space, it took days to offload risk. That is not a normal dynamic that people have felt for the better part

of ten years. So that's regulatory changes at practice. And when I look at what does the liquidity world look like today versus what it looked like ten years ago, I think it's about ten percent as liquid because of the the amount of supply that primary deals are holding, and it's only going to really feel that pain in times of stress. December was an event study for that that will be looking at for a long time. So

just real quick here about thirty seconds. Clear Channels selling bonds today with triple C ratings to more than two billion dollars of bonds. Would you be a buyer? Um, we're not able to talk about listening those to our clients whatsoever. Uh, triple ceas don't offer to me from a strategic perspective much value at this level. Intering you bring up Clear Channel. I've very intimately involved with clear Channe.

I was there during the founding of that company and the growth of that company and when it was had a very good capital structure. Unfortunately leveraged buy out in the peak of the market in two thousand and six and just put a capital structure on there and that it couldn't stand so bankruptcy. And here we are trying to bonds two billion dollars debt. So Tom Kennedy, thanks so much. Tom Kennedy is ahead of fixed income strategy at JP Morgan Private Banking. Having passed through all things FED.

He spent ten years of the Fed, five years with the former Fed New York Fed chairman um Uh Bill dully. Thank you me who just had a great article out at least and I've been talking about. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyds. I'm on Twitter at Lisa Abram woits one. Before the podcast, you can always

catch us worldwide. I'm Bloomberg Radio