Puerto Rico’s debt vexes investors
But the average investor won’t feel the worst of island’s financial woes.
There was a time when investors couldn’t get enough of Puerto Rico’s bonds.
They were the ultimate trifecta: triple, tax-exempt bonds. If you bought Puerto Rico bonds, you paid no local income tax on the “coupons,” the periodic interest you are paid for buying the bond. You paid no state tax on the coupons. You paid no federal tax on the coupons.
Now, the bonds’ price is plunging and investors are staying away. A virtually bankrupt Puerto Rico is recovering from the biggest natural disaster it has suffered in any of our lifetimes. The dividends on the U.S. territory’s $70 billion in bonds have evaporated. Bondholders are lucky to get 30 cents on the dollar, which is where they are trading these days.
The financial situation was making it difficult for the government to function, even before the devastating hurricane.
As its economy has withered, its debt has mounted and the unemployment rate has settled into double digits. The territory’s agriculture department suspended subsidies to farmers. Businesses experienced power failures from the state-owned utility. The treasury withheld tax refunds.
Many suppliers, unpaid and unwilling to extend commercial credit, began demanding payment on delivery by a government that owes them a total of $2 billion.
How will this affect investors like you and me? Unless you bought individual bonds as opposed to buying them through a mutual fund, you probably won’t see much of a haircut.
Most of the territory’s bonds are owned by large-scale investors with diversified portfolios. About a third are owned by hedge funds such as Marc Lasry’s Avenue Capital and Seth Klarman’s Baupost Group, both of which are experienced in highrisk, distressed debt. A big chunk is owned by mutual funds, which operate municipal bond funds of which Puerto Rico debt likely represents a small portion.
“The average investor on the street will be unaffected,” said David Kass, a professor of finance at the University of Maryland.
The bonds are rated near the lowest of the low by agencies such as Fitch and Standard & Poor’s. There are 18 government agencies who were issuers of various securities. The economy has withered and the population has plummeted.
There are lawsuits galore, a virtually bankrupt territory that may not recover for years from Hurricane Maria, and an eight-member oversight board that is helping the territory of 3.4 million people settle the massive obligations. President Donald Trump fanned the flames this month when he said the debt burden would have to be wiped out.
Trump advisers swiftly walked back his comments and pointed out that Puerto Rico, 1,500 miles from Washington, was going to have to deal with its debt on its own. No bailout. No wipeout.