Puerto Rico Senator: Let's Accept Our Own Bonds as Collateral

(Bloomberg) -- A top Puerto Rico senator is suggesting that the bankrupt island accept its own deeply distressed bonds as collateral -- at nearly full-value, no less.

The bill would allow local bondholders, known as bonistas del patio -- a group of some 60,000 believed to hold $15 billion in securities -- to use as much as 90 percent of the notes’ nominal value to obtain loans to nurture job-creating businesses.

Commonwealth Senate President Thomas Rivera Schatz said the legislation is meant to encourage investment by freeing “dead capital.” But it could instead make the storm-ravaged island’s perilous financial situation even less tenable: If the loans sour, the government would acquire securities worth pennies on the dollar for a sizable net loss.

“That enormous capital of $15 billion must be reactivated to facilitate local investment, production, job creation, increase exports and reduce imports," Rivera Schatz wrote in the bill.

Puerto Rico was already in deep decline before Hurricane Maria hit in September and many bonds are in default. Its fiscal recovery plan calls for resuming debt payments in two years and estimated the central government might be able to repay nearly half of the $41 billion it owes to bondholders once it emerges from bankruptcy.

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