Report: Half of Puerto Rico’s Debt is Interest owed on Bonds
SAN JUAN – Nearly half of Puerto Rico’s $69 billion debt is not money the island borrowed but instead interest owed on bonds underwritten by Wall Street firms that include Goldman Sachs, Citigroup, Merrill Lynch, Morgan Stanley and Bank of America.
The information is contained in a report from the ReFund America Project, an organization that tackles the impact the financial crisis has had on the financial health of U.S. cities to “help local organizations restore the balance of economic power.”
The report, titled “Puerto Rico Payday Loans,” says the jist of the crisis centers on so-called capital appreciation bonds, or CABs. This is a long-term bond with compounding interest on which the borrower does not make any principal or interest payments for the first several years, and, in some cases, until the final maturity of the bond.
“In this way, it is similar to a negative amortization mortgage, in which the outstanding principal actually grows over time because the unpaid interest gets tacked on to the amount owed and compounds. Because of this structure, borrowers often end up paying extraordinarily high interest rates over the life of the bonds. In this way, a CAB is like the municipal version of a payday loan,” the report said
According to the ReFund America Project, Puerto Rico borrowed $4.3 billion using this costly form of debt. When the bonds expire decades from now, the island will have to pay back $33.5 billion in interest.
“Puerto Rico has $37.8 billion in outstanding CABs, accounting for a very large share of its total outstanding debt. The underlying principal on these CABs is just $4.3 billion. The remaining $33.5 billion is interest—an effective interest rate of 785%!” the report states
An estimated $36.9 billion of Puerto Rico’s outstanding debt is legally dubious because it belongs to the Puerto Rico Sales Tax Financing Corp., known popularly by its Spanish acronym as COFINA, the report says.
“The COFINA structure was created to refinance what was considered at the time to be “extra
constitutional” debt—a term that no one has ever defined but which calls its legality into question,” the report states.
The ReFund Project study says 63% of Puerto Rico’s total CAB debt belongs to COFINA.
CABs account for $23.9 billion of Puerto Rico’s COFINA debt.
“The underlying principal on the COFINA bonds is just $3.3 billion. The remaining $20.6 million is interest—an effective interest rate of 614%!” the report states.
Saqib Bhatti, director of the ReFund America Project, said in a recent televised program that his organization will be releasing a series of reports over the next couple of months that will look at the different ways in which Wall Street banks targeted Puerto Rico with predatory deals. It also says it will be calling upon the financial control board that will manage Puerto Rico’s finances to cancel some of the debt that it deems illegitimate.