Puerto Rico Bonds: Thanks But No Thanks for the 'Charity'

(Bloomberg Gadfly) -- Puerto Rico is mired in a crisis after suffering through its most damaging hurricane in nearly a century. Its electrical infrastructure is in shambles. Residents are struggling to find potable water. Gasoline is in short supply, making it difficult for aid workers to distribute supplies.

In short, this is not the time to talk about the island's unpayable $74 billion of debt.

But that did not stop some of the island's creditors from pursuing a better deal this week. Worse, they tried to cloak it in the guise of altruism. They offered to lend Puerto Rico an additional $1 billion in return for 85 cents on the dollar for a third of their outstanding bonds and a better position in line to get repaid, similar to a previous settlement that had already been rejected. Not surprisingly, Puerto Rico dismissed the offer on Thursday.

These investors, which own bonds backed by the island's distressed and now nearly demolished Puerto Rico Electric Power Authority, probably know that talking about financial negotiations when people are suffering is unsavory. But their investments are plunging in value by the day, and if the prospect of recovering money was slim before Hurricane Maria, creditors could now be facing a much lower recovery.

It's not as if Puerto Rico can't use the money. In fact, it needs it desperately to help meet local matching requirements to receive Federal Emergency Management Agency funds. If the commonwealth doesn't receive near-term help, and lots of it, there's a good chance that Puerto Rico will never recover. Residents will flee the island, heading to the mainland U.S. instead, and large swaths of it will never be rebuilt.

But that help needs to come without strings and without creditors jockeying for a better place in line for whatever scraps are left after the government figures out how to get relief supplies off the docks and into the hands of its suffering citizens, how to open more hospitals and how to restore power. 

This is a no-win situation for investors, but they can only make themselves look bad by publicly focusing on preserving the value of their holdings while a catastrophe plays out.

Our sense of humanity is being tested. It is not measured by a few extra cents on the dollar.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

To contact the author of this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.