Puerto Rico: Beautiful but bankrupt. Who’s next?

The US Territory of Puerto Rico, an island of striking beauty and history, filed for bankruptcy protection on May 3, the largest municipal bankruptcy in US history.  The filing involves $74 billion in bonds and another $49 billion in pension obligations, over $40 billion of which is unfunded.

We visited Puerto Rico last year while Congress was debating the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA).  Prior to President Obama signing the Act into law in 2016, Puerto Rico had no mechanism for filing for protection from creditors.

While visiting Puerto Rico, we struck up conversation with many locals who proudly showed the numerous government housing options, most of which included free electricity, water and cable TV (don’t know why cable TV was such a big deal but it is a source of great pride among locals).  They boasted of government unemployment benefits for nearly half of the working-age population and a normal retirement age in one’s early 50’s.  It was clear that this model is not sustainable but that did not seem to faze the locals – it is just the way their economy is set up and they like it that way.  They also had many stories of politicians going to jail for corruption.  Correlation between giving away the key to the treasury and going to prison?  We don’t know but seeing politicians of the opposite party being carted off to prison seemed to be a national pastime of sorts.

PR flag

The NY Times reports marches BEFORE Puerto Rico’s bankruptcy filing against austerity that is surely coming.
nytimes.com/2017/05/03/business/dealbook/puerto-rico-debt.html

Who’s Next?

George Mason University ranked all 50 states for solvency in a June 2016 study (https://www.mercatus.org/statefiscalrankings) and the weakest states are:

Connecticut #50Map of US
Massachusetts #49
New Jersey #48
Illinois #47
Kentucky #46
with Hawaii and California not far behind at #45 and #44, respectively.

Forbes, JPMorgan and Price WaterhouseCoopers rank them similarly (www.forbes.com/sites/johnmauldin/2016/07/28/dont-be-so-sure-that-states-cant-go-bankrupt/#40fc3fa72f2d).

What does this mean?

It means that even though markets have been topping off at new highs and world wealth has never been greater, fundamental structural economic fault lines are growing.  And with imminent insolvency of entitlement programs like Social Security and Medicare, the US government has got to figure out a way to avoid a fate similar to Puerto Rico.  It means we can’t keep giving everything away before creditors force us to give everything up.  It means a little discomfort now to avoid incredible pain and dislocation later.  Can the US Congress get it right during the Trump years?

 

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At Vertical Capital Advisors, we are most often engaged by industry leaders to be the bridge to the capital they need to fuel growth.  We start with great leaders at great companies that have compelling, profitable business plans where the only missing ingredient is capital.

ABOUT VERTICAL

Vertical Capital Advisors is an Atlanta-area business advisory firm built on creating tangible value for our clients, serving clients in just about every industry.  Our clients are both capital growers and capital allocators.  How can Vertical help your firm maximize value?

Joe Briner
Managing Director
Vertical Capital Advisors LLC
briner@verticalcapitaladvisors.com
866-912-9543 ext 108

 

 

 

 

Have you ever wondered if you should call a professional to help your business restructure its debt?

hand-grabbing-for-rope

You see reports in the financial press and mainstream media about companies that have spectacular missteps and flame-outs but for every story you see, there are perhaps hundreds or even thousands that you don’t.  In fact, there were 12,764 business bankruptcies filed in the first six months of this year, that’s over 2,000 per month on average:

us-bankruptcies-2016

Source: http://www.uscourts.gov/report-name/bankruptcy-filings
Chart © Vertical Capital Advisors LLC 2016

Every one of these cases is a tragedy involving the loss of up to hundreds of millions of dollars and countless jobs.  The human toll, the distress caused in the lives of thousands of people, is incalculable.

So have you ever wondered if you should call a professional to help your business restructure its debt?  If the answer is yes, you have wondered, then the next step is to make a call.

You see, if the right financial professional is involved early enough in the process, many more options are open to the leaders of the business.  The right plan can shed unproductive assets, invest resources in revenue and profitability drivers and create a leaner, more focused, more agile enterprise that can once again compete effectively in the marketplace.  It is always a tough process but guess what, it is much easier than bankruptcy.  We know.  We often get the call from creditors who have had enough and are ready to pull the plug.  We have liquidated many businesses and the shock and tears and disbelief sadden the soul.

In most cases, your creditors and investors are delighted to see you take affirmative action to resolve a crisis.  They much prefer you call us to craft a solution over them calling us to liquidate your business.  They almost always give us another length of runway to develop and implement a recovery plan (that they approve) and sometimes they even provide additional funds to make it happen!

If you have the right team, a credible plan and the resources to implement it, save some modest amount of capital to prime the pump (modest being defined by the size of the enterprise – ranging from tens of thousands to hundreds of millions of dollars), your business can be reinvented so it can once again thrive.

Joe Briner
Managing Director
Vertical Capital Advisors LLC
briner@verticalcapitaladvisors.com
866-912-9543 ext 108