Early last week, following an announcement of new bankruptcy legislation, ALL outstanding debt of the Commonwealth was downgraded by Moody’s/. The new legislation, which we touched on last week http://snwam.com/blog/2014/6/30/muniland-implications-of-puerto-ricos-recovery-act, calls into question Puerto Rico’s willingness to pay bondholders, a key component of credit quality and one of the last pillars of the argument from remaining proponents of holding these securities. Subsequent to this new information, last week’s trading volumes surged across various issues from the Commonwealth. While much of the truly distressed trading was concentrated in the Electric Authority’s (PREPA) securities and to a lesser degree the other major component units, all debt saw declining prices. Several block trades for 20 year PREPA paper printed at 40 cents on the dollar. Meanwhile, the recently issued General Obligation bond has also seen a decline in price over the last several trading sessions. Originally issued in March at 93 cents on the dollar, these bonds have traded down nearly 10 points to just over 84 cents on the dollar. Thus far selling pressure has been confined to PR specifically, and not affected the broader market. However, we remain cautious that as the story makes its way through major media outlets and weekend publications, not to mention client Q2 statements, it could cause fund outflows. This could put pressure on the market as whole. Our clients can rest assured that they have no exposure to this drama and that our portfolio managers are prepared to take advantage of any opportunities this might create via market dislocation.