Signaling worsening financial trouble for the island, Puerto Rico's governor, Alejandro Garcia Padilla, on Wednesday proposed a legal means to revamp the debt of some its largest public corporations, which provide vital services like electricity, Michael Corkery writes in DealBook. The new law is meant to quell concerns that Puerto Rico's inability to file for federal bankruptcy protection would set off a chaotic scramble among creditors in the case of a default. Investors say the proposal raises the threat that one of Puerto Rico's agencies could falter soon.
Puerto Rican bonds are widely held by US bond funds.
There are many vulnerabilities in the municipal bond market right now. Yesterday, I reported on problems in Harvey, Illinois (SEE: Tip of the Iceberg in Illinois? SEC Obtains Court Order to Halt Fraudulent Bond Offering by City of Harvey, Ill.)
Given that interest rates are headed higher anyway, this is no time to be holding municipal bonds and certainly not managed bond funds. Consider yourself warned.
Note: The municipal bond problems should not be viewed as a negative for Puerto Rico itself. I consider the area an extremely undervalued opportunity. The government of Pureto Rico is not the same thing as the islands themselves.