Puerto Rico sales-tax bonds soar on news of debt deal

Puerto Rico bonds soared as much as 30% after the island reached a debt restructuring deal with owners of its sales-tax backed securities, marking a significant milestone in the government’s record bankruptcy.

The U.S. territory’s subordinated sales-tax bonds due in 2039, the most actively traded, jumped to about 53 cents on the dollar from 41 cents Wednesday, while senior-lien bonds due in 2040 jumped to as much as 89.5 cents from 81.7 cents. The sales-tax bonds were the most actively traded municipal securities early Thursday, according to data compiled by Bloomberg.

Gov. Ricardo Rossello said the preliminary deal with bondholders and insurers would reduce Puerto Rico’s sales-tax-backed debt — known as Cofina — by about a third and save $17.5 billion. If enacted, it would allow owners of bonds with the highest claim on the funds to recoup 93% of their investment, with 56% recoveries seen for owners of subordinated securities, according to a term sheet released by the island. That’s more than investors had expected.

“It’s substantial to where those bonds are trading right now,” said David Tawil, president and co-founder of Maglan Capital. “Bondholders should be pretty happy about it.”

It is the second major agreement for Puerto Rico in as many weeks, coming on the heels of the one struck with its power company’s bondholders July 30. The deal will need to be sent to bondholders for a vote and win approval from the judge overseeing the bankruptcy before it takes effect.

The accord advances Puerto Rico’s effort to cut a debt load that became unpayable after decades of free spending and corruption collided with a long-lasting recession. Now, it’s trying to rebuild from Hurricane Maria and carry out a drastic course correction while it negotiates with creditors.

The deal extended a rally in the price of the securities this year amid expectations that the island will recover more quickly than initially expected from the hurricane that battered it in September. The gains Thursday left the price of the senior sales-tax bonds nearly triple what it was in late December, when they traded for about 32 cents.

Mr. Rossello said the deal was proof of his commitment to consensual dealmaking, adding that he was always open to such agreements as long as they don’t endanger essential services and the island’s most vulnerable. But such agreements have proven difficult, as a tangled group of interest groups all vie for preferential treatment, with billions of dollars and the future of a U.S. territory hanging in the balance.

Natalie Jaresko, executive director of the Financial Oversight and Management Board for Puerto Rico, said the agreement was a “big step forward.” As part of sweeping legislation that gave Puerto Rico access to a form of bankruptcy protection, Congress installed the board to keep tabs on the island’s spending.

(More: Rise of Puerto Rico bonds has blown investors’ minds)