Puerto Rico Balances Budget, But Debt Still Has Island On Brink Of Financial Collapse

This July 16, 2014, photo, shows an aerial view of people enjoying the beach in San Juan, Puerto Rico. The territory's government has managed its first balanced budget in more than a decade. Sales tax revenues are up and its publicly owned power company has won breathing room to pay its debts. (AP Photo/Ricardo Arduengo)

SAN JUAN, Puerto Rico (AP) – Puerto Rico's government has managed its first balanced budget in more than a decade. Sales tax revenues are up and the publicly owned power company has won breathing room to pay its debts.

The U.S. territory has managed to buy some time to stave off an economic crisis, but it may only be for a moment. As the island tries to pay off some $73 billion in public debt, investors crucial to keeping Puerto Rican bonds afloat are wary at best.

"Most people are very much in a watch-and-wait mode," said David Tawil, co-founder and portfolio manager of New York-based Maglan Capital.

Puerto Rico has a shrinking population and economy. A nearly eight-year recession has sent businesses and people fleeing to the mainland U.S. and spooked those holding billions of dollars of the island's debt. That has sharply raised the cost of government borrowing and lowered the value of the bonds it has issued.

One looming threat is the condition of the Puerto Rico Electric Power Authority, which is roughly $9 billion in debt. After raising fears it would use a new debt-restructuring law to default on a credit payment due July 1, it announced it had won a reprieve: Creditors agreed to postpone payments on about $800 million until July 31.

Officials also announced that revenues from the government's sales and use tax for this past fiscal year rose 7 percent, though that was short of projections.

Those glimmers of good news followed an uproar on Wall Street over a law signed June 28 that allows certain public corporations to work with creditors and restructure their debt. If no agreement is reached within nine months, the case would go to court. That makes investors nervous about a potential loss of money, depending on the court's ruling.

Gov. Alejandro Garcia Padilla touted the law as a way to protect the island's general fund, which long has been used to support the island's public corporations, which account for about 40 percent of Puerto Rico'spublic debt. If a public corporation defaulted on its debt without the law, bondholders could move to increase rates, which would affect public services, he said.

Treasury Secretary Melba Acosta said in a statement that the restructuring law aims to make those corporations self-sufficient.

"We stand behind the act and will defend it as a reasonable and necessary measure to protect the interests of all stakeholders of our public corporations," she said.

But ratings agencies punished Puerto Rican bonds with a flurry of downgrades. Franklin Templeton and Oppenheimer investment funds filed a lawsuit the same day the law was signed, arguing it was unconstitutional, and financial companies began to hold conference calls with jittery investors.

While Garcia repeatedly reminded bondholders of his efforts to stabilize the economy and generate revenue, "all that stuff is secondary at this point," Tawil said. "This law — its potential power, its unknown use and its unknown legality — I think, carries a much heavier cloud over Puerto Rico's solvency and the potential recovery to creditors than any of the fundamental progress that is being made."

It's only a matter of weeks before the financial future of the power company will be known — whether it will be the first to use the new law, said Triet Nguyen, founder of Axios Advisors LLC, an Illinois-based municipal research and investment advisory company.

"Something is going to happen there by middle of August," he said. "I think pretty much all the public corporations have severe liquidity problems."

Creditors are closely watching whether the government tries to reach substantial agreements with banks this month on how to handle upcoming payments, said Dick Larkin, director of credit analysis at Florida-based HJ Sims & Co. Inc.

"They're going to be looking for some sign of progress, not just a temporary relief," he said.

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