Taking Stock: No Lull after the Storm for Puerto Rico Bonds

November 15, 2017 / by Brandon Jones, Consultant, Private Wealth

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Puerto Rico just can’t catch a break. The island was devastated by Hurricane Maria in late September, leaving millions of residents without power, electricity, or running water. The category 4 hurricane was the most powerful storm to hit the US territory in almost a century. Much of the infrastructure on the island has been destroyed and needs to be rebuilt. Our thoughts go out to all impacted by this devastation.   

As the island struggles to address the humanitarian crisis that’s unfolding, a few organizations have stepped up, offering assistance in innovative ways to restore communications as well as bring the electrical grid back online. However, additional aid is needed to get the island back on its feet.  The already dire financial situation has worsened and there’s over $70 billion in debt that’s standing in the way of recovery.

The magnitude and scale of the damage has caused the local economy to almost grind to a halt, disrupting many sources of revenue on the island and forcing a recalculation of a fiscal plan. As a result, bond prices have slid even further downwards. In addition, creditors will likely be asked to bend more when the debt restructuring process proceeds, further reducing ultimate recovery values for bondholders. The recent negative price action was exacerbated when President Trump visited the island in October, suggesting that the $73 billion of debt be “wiped out.” While these comments were quickly dialed back by the president’s budget chief, bond prices remain at depressed levels. 

On the other hand, insured bond prices saw limited price action as these securities tend to trade more on the stability of the insurer as opposed to the underlying credit.

A substantial amount of Puerto Rico’s debt is held by mutual funds and hedge funds. That said, at this point, most investors who own the debt are likely well aware of the risks involved. PR Blog.jpg

The situation remains fluid and the political rhetoric continues to create both uncertainty and volatility in the market.  We are monitoring the situation closely. Stay tuned for future updates. 

Topics: Endowments & Foundations, Private Wealth, Research, Taking Stock

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