Puerto Rico in the News Yet Again

A raft of Puerto Rico-related headlines hit the financial newswires last week, this time driven by comments from President Trump regarding the need to “wipe out” outstanding PR debt as a way to help the island recover financially after Hurricane Maria. Shortly after these comments hit the wires, stories emerged about how they may shake the entire municipal market. At one point last week, a Bloomberg article titled, “Trump Speaks. A $3.8 Trillion Market Hears a Mortal Threat,” was among the most read stories on the terminal. Our reaction is nuanced. 

We find it difficult to envision a scenario in which the Federal Government is able to eliminate large swaths of bonded debt with the stroke of a pen. This view was affirmed by comments from administration officials quickly after the President’s comments were broadcast. If this view proves correct, we also believe that the broader muni market will be unaffected by isolated credit stories such as Puerto Rico. Puerto Rico has been under restructuring protection since May of this year, and has been experiencing financial difficulties for many years. Despite this, the municipal market has performed quite well, last week included. For more information on the restructuring of PR debt, please see our note from May 8th here.

Recently, we have also received questions from clients regarding how the President’s comments, and Hurricane Maria, may impact the one series of PR debt we do own at SNW, bonds issued by the Puerto Rico Housing Finance Authority. As a reminder, these bonds are directly backed by payments from the U.S Department of Housing and Urban Development and are completely isolated from other series of PR bonds. 

We have seen no impact on these bonds from recent events. They continue to carry an investment grade rating and have not seen a material change in price since we initiated the position a few years ago. We continue to purchase bonds opportunistically for clients who do not own the position, including last week. 

We have also focused in on the direct impact on these bonds from the hurricane and what can happen if PR Housing Authority housing units are damaged or destroyed. These bonds carry an extraordinary redemption provision, which states that if Housing Authority units are damaged or destroyed due to a fire or natural disaster, and insurance proceeds are not used to rebuild the units, then the bonds can be called at par (100). We do not believe this will occur, but recognize that par is the downside price risk.

As always, we are paying close attention to developments in the market. Last week provided an opportunity to add a specific bond to client accounts that offers value. Should a more market-wide reaction occur to credit specific events, we stand ready to take advantage of it.

Source: Bloomberg