Puerto Rico’s Bonds Reach New Low - Income Investing

Puerto Rico bonds fell to a new low Thursday as its financial crisis deepened. The Commonwealth’s general obligation bond maturing in July 2035 was selling for just 78.5 cents on the dollar Thursday morning.

The latest in a collection of increasingly grim headlines came across the wires after legislators rejected the Governor’s tax plan in a Wednesday night vote. Gov. Alejandro Garcia Padilla warned the ‘no’ vote could bring the Commonwealth’s finances to the brink.

It was just one week ago that top finance officials warned the government could shut down in a matter of months if the legislature doesn’t pass tax increases that would pave the way for the Commonwealth to borrow more money from investors.

The real problem with the vote is that it indicates there is political discord brewing, says David Tawil, portfolio manager at Maglan Capital, which invests in distressed debt, but is currently avoiding Puerto Rico.

“It was a surprise that it did not go through,” Tawil says. “Now, in addition to everything else going on, we have this potential for a layer of political dysfunction that makes things that much harder and that much more uncertain.”

Research firm Strategas thinks Puerto Rico can avoid default in 2015, but its utility Puerto Rico Electric Power Authority (PREPA) may not be so lucky, it believes.

However, the authority did get some good news Thursday when a group of its bondholders agreed to extend its forbearance agreement for an additional 35 days to June 4. According to the release:

Under the agreement PREPA has agreed to provide an informative session between the authority’s rate consultant and creditors’ advisors by May 11 and deliver a proposal for a comprehensive recovery plan to the bondholders’ advisors by June 1. Both dates are within the 35 day time frame.
As for the Commonwealth, a default in the next two-five years seems “inevitable,” Strategas wrote in a note to clients Wednesday. But the longer it can be staved off the better for the broader muni market:

The good news for markets is that the longer this takes to play out, the less damage we would expect to see for broader muni markets and the U.S. economy as a whole. The bad news is that because 2015 seemed early for a rapid slide towards default, if it were to happen this year, particularly during a tightening tantrum, then we very well should expect to see some collateral damage in muni markets in the form of broad spread widening.
By Amey Stone

Puerto Rico’s Bonds Reach New Low - Income Investing

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