Prices of Puerto Rico debt fell on Monday after a published report quoted Gov. Alejandro García Padilla as saying the commonwealth cannot pay its $72 billion in debt.
The governor said the commonwealth would likely seek significant concessions from creditors, which could include putting off some debt payments for as long as five years, the New York Times reported.
Puerto Rico commonwealth Series 2014A general obligation 8s of 2035 were trading as low as 68.50 cents on the dollar on Monday, according to the Municipal Securities Rulemaking Board's EMMA website, a high yield of 12.254%. There were 68 trades totaling $129 million; 27 customers sold the bonds, 28 customers bought them while 13 were done as inter-dealer trades.
On Friday, the GOs traded as low as 76.75, according to EMMA, a high yield of 10.874%. There were 19 trades totaling $22 million; 10 customers bought the GOS, three sold them while six were done as inter-dealer trades.
"The news is negatively affecting both GO and revenue paper," a Markit analyst told The Bond Buyer.
He cited the Puerto Rico Public Buildings Authority's 2012 Series U government facilities revenue refunding 5 1/4s of 2042, which were trading in the 55 range on Monday after being evaluated at 60 on Friday. Markit also reported the commonwealth's Series 2012A GO public improvement refunding 5s of 2041 were trading at 59.25, compared to 64 on Friday.
"The facts are the situation isn't looking good, the pending PREPA July 1st default looms on the market, the possible restructuring of the Government Development Bank debt and the possible postponement of GO set-asides have sent alarms to GO bondholders," J.R. Rieger, Global Head of Fixed Income at S&P Dow Jones Indices, said in a market comment. "Last week, the GO debt had plumbed new depths helping to record a negative 5% month-to-date return for the S&P Municipal Bond
Also last week, the average yield of bonds in the broader S&P Municipal Bond
Some analysts said worry over Puerto Rico's woes spilling over into the larger muni market were unwarranted.
"Fears of credit contagion from Puerto Rico are unfounded, regardless of what media headlines may convey," Municipal Market Analytics wrote in a comment on Monday. "The commonwealth's reckless use of debt-financed budgets is, in its breadth and depth, unique among U.S. municipal issuers. State and local credit quality has been steadily improving in the last 12 months."
But MMA did say some holders of Puerto Rico debt may be in for a nasty surprise if they haven't been doing their credit homework.
"The governor's statements that the commonwealth's debts are 'unpayable' will likely come as a surprise to many Puerto Rico GO/COFINA bondholders who have willfully ignored the inevitability of a painful debt restructuring across all Puerto Rico securities," MMA said.
Moody's Investors Service said it was assessing what, if any, affect the latest news will have on the broader muni market.
"Assessing how any Puerto Rico defaults will affect the municipal bond market overall is difficult at this stage," according to Ted Hampton, Moody's Vice President. "Past defaults by municipalities including Detroit and Jefferson County, Ala., had little broad market effect."
He added that while the size of Puerto Rico's default would be larger Detroit or Jefferson County, "The vast majority of Moody's rated municipal credits have strong ratings and are unlikely to be affected by Puerto Rico's debt restructuring."
