Municipal Bonds
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What is behind the rally in Puerto Rican bonds in default?
(03 Apr 2018) When I worked at a regional brokerage firm in the late 1990s, Puerto Rican municipal bonds were all the rage. For munis to be triple-tax-free, investors had to select from issuers in the same state where they resided. For residents of Kansas, for example, the disadvantage was great—think of how many more revenue and general obligation bonds were issued in states like California, Texas, or New York. There was one exception to that rule: investors in any state could buy triple-tax-free municipals from Puerto Rico.
It seemed almost too good to be true, and now we know why. When Puerto Rico went into default, bondholders saw the values of their debt holdings drop to around 20 cents on the dollar. A $10,000 face value bond became worth $2,000 on the secondary market. All of a sudden, however, prices on the island's largest issues have been rallying, reaching a high of 45 cents on the dollar. What is the reason for this bizarre rally on bonds in default? There have been some positive signs of life stirring as Puerto Rico emerges from its fiscal disaster. More money appears to be on hand, which should equate to more favorable treatment by creditors during the debt-restructuring talks.
They need all the help they can get: 45% of the island's population lives in poverty, yet government entities were able to issue over $70 billion in debt instruments. Sounds a lot like the sub-prime loan crisis of 2008/2009—sell all of the debt you can, and then leave someone else holding the bag.
(03 Apr 2018) When I worked at a regional brokerage firm in the late 1990s, Puerto Rican municipal bonds were all the rage. For munis to be triple-tax-free, investors had to select from issuers in the same state where they resided. For residents of Kansas, for example, the disadvantage was great—think of how many more revenue and general obligation bonds were issued in states like California, Texas, or New York. There was one exception to that rule: investors in any state could buy triple-tax-free municipals from Puerto Rico.
It seemed almost too good to be true, and now we know why. When Puerto Rico went into default, bondholders saw the values of their debt holdings drop to around 20 cents on the dollar. A $10,000 face value bond became worth $2,000 on the secondary market. All of a sudden, however, prices on the island's largest issues have been rallying, reaching a high of 45 cents on the dollar. What is the reason for this bizarre rally on bonds in default? There have been some positive signs of life stirring as Puerto Rico emerges from its fiscal disaster. More money appears to be on hand, which should equate to more favorable treatment by creditors during the debt-restructuring talks.
They need all the help they can get: 45% of the island's population lives in poverty, yet government entities were able to issue over $70 billion in debt instruments. Sounds a lot like the sub-prime loan crisis of 2008/2009—sell all of the debt you can, and then leave someone else holding the bag.