Wednesday, August 5, 2015

NYT: Puerto Rico Financial Earthquake May Be Just Ahead

Even NYT has figured out it is bad. From the slow-witted, co-opted, gray lady:
While Puerto Rico’s first bond default in its history reverberated through the financial markets on Tuesday, another move by the cash-poor island may provide a clue to where the next trouble spot lies.

After openly acknowledging on Monday afternoon that it had not made a $58 million bond payment, the government quietly disclosed in a financial filing later that afternoon that it had temporarily stopped making contributions of $92 million a month into a fund that is used to make payments on an additional $13 billion in bond debt. A small payment from the fund is due on Sept. 1.

Unlike the bond payments that went into default on Monday, the ones coming due are on general obligation bonds — the kind many investors have been led to believe would never go into default because the issuer’s full faith, credit and taxing authority stand behind them....

The general obligation payment due to bondholders on Sept. 1 is for a mere $5 million, an amount so small that even if the redemption fund is empty at that point, Puerto Rico could still produce the cash right out of general revenue. It would presumably want to do so because of the constitutional requirement.

But a much bigger payment on the general obligation bonds, about $370 million, comes due on Jan. 1.

If Puerto Rico misses that one, “it would be an earthquake for the markets,” said Matt Fabian, a partner at Municipal Market Analytics, a financial research firm.

“Defaulting on the Public Finance Corporation bonds was a change in direction,” he said, referring to the government unit whose bonds have been in default since Monday. “Defaulting on the general obligation bonds would change the game entirely.”


1 comment:

  1. Interest on PR muni bonds is exempt from state and Fed tax in all 50 states. Years ago, the mutual fund adviser I worked for managed many single state muni bond funds and, because of this quirky tax exemption, they were absolutely loaded with PR paper, sometimes as much as 25% of total assets. In a lot of cases there simply was not enough single state paper available to invest in. I wonder if fund managers have exited PR paper already or will there be heavy/steady or panic selling to come. If I owned a fund like that I'd be checking the annual and semiannual reports closely and calling the adviser.