- March 20, 2017
- Posted by: Dean Myerow
- Category: Economics
PUERTO RICO BONDS SLIP AS REALITY SETS IN THAT THE COMMONWEALTH LACKS SUFFICIENT RESOURCES TO PAY ITS HEFTY DEBTS
Reality set in for investors of Puerto Rico bonds as prices weakened significantly as the federal oversight board agreed with Puerto Rico’s Governor that you just can’t get blood from a stone. The oversight board created through the PROMESA legislation passed by the 114th Congress which empowered the board to craft and approve a financial recovery plan for the debt strapped island. The commonwealth has been struggling to cope with a $70 billion debt load from 13 distinct bond issuers on the island.
The board accepted Governor Ricardo Rossello’s assessment that the only path to closing the island’s perpetual budget deficit is to reduce the amount of payment of debt service to holders of Puerto Rico’s bonds. The cut of annual debt service to $800 million from the $3 billion owed each year is pretty draconian. Based on the proposal only 26 percent of debt service will be paid and principal payments stretched out across the next decade. The fact that there is a limited pie to work with will likely heat up ongoing battles between different bondholder groups; most notably the General Obligation bond holders who are pitted against the Puerto Rico COFINA bondholders. COFINA is also known as the Puerto Rico Sales Tax Financing Corporation.
The benchmark Puerto Rico General Obligation bond which carries an 8% coupon rate and matures in 2035 dropped in price from trading at approximately 72.5% percent of par to 67.5% in late trading on March 14. Trading activity can be found on the MSRBs site EMMA. The bond auction sites also appear to have heavy bid-wanted action with sellers looking to liquidate some of their holdings as they assess a future for the commonwealth that will likely include legal battles between not only different classes of Puerto Rico’s bondholders but also between bondholders, pensioners, and the balancing need for essential services in the face of financial austerity.
Source: Bloomberg LP Analytics
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Las Olas Wealth Management led by Dean Myerow and Sean Vesey (www.lasolaswealth.com) provides high-net-worth families and investment professionals with direct access to the municipal bond market. Our approach to portfolio management is to combine customized computer assisted modeling to purchase and ladder kicker bonds, many of which are insured general obligation and essential service bonds. The results for our clients are short duration, high quality municipal bond portfolios which are diversified by sector and region.
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