2017-10-12 / Business News


It’s not yet time to invest in Puerto Rican debt

There is no doubt that the stock market has enjoyed the Trump presidency. Equities have risen to new highs day by day. But the flip side to this euphoria has been sudden and sometimes dramatic short-term volatility caused by the president.

The president traveled to Puerto Rico and an off-the-cuff comment during a TV interview resulted in a dramatic free-fall in bonds tied to the island territory. So why did Puerto Rican bonds lose so much of their value and how will this affect the island and the rest of the country?

Trump’s comment came during a Fox news interview when he was discussing the massive amount of debt owed by Puerto Rico to its creditors. He stated that the territory owed a lot of money to big Wall Street banks like Goldman Sachs and that his administration was going to “wipe that out.”

Investors’ reaction to that comment was swift and significant. Before Trump’s comments, General Obligation Bonds (bonds backed by the full faith and credit of the Puerto Rican government) were trading at around 60 cents per par value. After the comment, the bonds fell to around 38 cents per par value, as investors panicked, thinking the bonds were going to be made worthless.

Was the bond rout justified? There were several false statements in the president’s comments that would question this significant move. First, the majority of the bonds issued by Puerto Rico are not owned by large hedge funds and investment banks. In fact, only about 25 percent of the bonds are institutionally owned. The vast majority of the debt is owned by individual investors, many of them people living in Puerto Rico. So if the government did “wipe out” the debt, Main Street would bear the most pain, which is why there would be little congressional support behind it.

But more significantly, we have laws, not a monarch or dictator who can just direct the government to transfer money from one group to another on a whim. Currently Puerto Rican debt holders are in bankruptcy court and it is the laws and courts that will determine how much they receive, not the president.

So would I advise people to go out and buy as much Puerto Rican debt as possible at these price levels? No, I would be very cautious about owning the debt even after the drop in value. Prior to the island being ravaged by the hurricane, it was in significant financial troubles and most analysts predicted that bondholders would not fully recover their investments. That financial picture looks even bleaker today. The island government will need to spend significant money that it does not have to bring even basic services back on line. In addition, many Puerto Rican citizens are expected to permanently leave, rather than rebuild. This will further dampen future tax revenues which are needed to service the bonds.

As for those people who currently own Puerto Rican bonds, I would follow the news very closely relating to proposed aid to the island. If the aid is structured as a loan from the U.S. government to the territory, that would be very bad for bondholders, as that debt may be a higher priority in repayment and leave even less money for existing bondholders. The bonds could eventually be worthless.

But if the aid is structured as a grant, which would not need to be repaid, that could stimulate the island economy and be a significant boon to existing bondholders. ¦

— Eric Bretan, the co- owner of Rick’s Estate & Jewelry Buyers in Punta Gorda, was a senior derivatives marketer and investment banker for m ore than 15 years at several global banks.

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