Municipal bond analysts expect continued volatility in the trading values of Puerto Rico general obligation bonds, citing uncertainty over the island’s economic future, the level of federal aid after two hurricanes, and the Title III bankruptcy process.

Following Hurricane Maria’s landfall, President Trump said on Oct. 3 that the island’s debt should be wiped out. Though officials walked back that comment, the island’s recovery has been slow. Puerto Rico’s GO 8’s of 2035 have dropped in the secondary market from trades at 59.25 cents on the dollar on Sept. 12 to 32 cents on the dollar on Monday, according to Markit.

“In the absence of a robust means to value the bonds, 37 is no more accurate than 30 or 50," Matt Fabian, partner in Municipal Market Analytics, said after an Oct. 5 trade at 37.6 cents. "The legal uncertainty on its own is more than any bond model can handle. That the commonwealth likely will (and that the courts and Congress might) attempt to make bondholders responsible for the hurricane makes things substantially worse.”

Fabian added, “There should be no traditional ‘long term’ investors in Puerto Rico bonds.”

John Mousseau, director of fixed income at Cumberland Advisors, and Triet Nguyen, NewOak Fundamental Credit head of public finance credit, agreed. “Retail [investors] should not be buying uninsured paper,” Mousseau said. Cumberland owns a limited amount of insured Puerto Rico debt.

“Although the risk/reward equation is clearly more favorable at these new trading levels, any opportunities found in P.R. bonds are best suited for 'sophisticated' investors with more risk tolerance than the average retail investor,” Nguyen said Monday.

Howard Cure, the director of municipal credit research at Evercore, said that he expected continued volatility of the bond on the secondary market. In an email he said policy issues “that would have an impact on the expected recovery rate would include the following:

  • Federal Emergency Management Agency funding to merely restore seriously neglected infrastructure or enhance the utilities, public buildings and transportation systems?
  • Reformulation of federal Medicaid funding to remove the cap?
  • Comments by the President and cabinet members concerning debt recovery and relief?
  • Any federal programs to facilitate an economic expansion such as permanent elimination of the Jones Act or restoration of tax subsidies (e.g. Internal Revenue Service 936)?”

Fabian in the Oct. 10 MMA Outlook said he thought trading in the bonds might rise “in the near term.” However, “MMA continues to grow more bearish with respect to Puerto Rico’s ability to secure (and effectively deploy) federal or third-party funding for its recovery.” The slow recovery from Maria will induce more emigration from the island and this will “permanently reduce the Puerto Rico economy.”

Before the hurricane struck, the Puerto Rico Oversight Board had approved a fiscal plan that contemplated debt payment on all central government debt of 24 cents per dollar owed over the next nine years, with the possibility of additional payments further out as the economy recovered.

David Tawil, president of Maglan Capital, was also pessimistic about Puerto Rico bond prices. He cited the probability of wrangling between local government and federal government over aid, recovery taking longer than expected, and uncertainty relating to the Oversight Board. He also pointed to a lack of certainty over when bankruptcy court hearings will restart, the possibility of a worse-than-expected loss of economic activity after the hurricanes, the potential for mass flight from the island, and continued misrepresentation of the economic circumstances by the local government.

Of the six analysts commenting for this story, Peter Delahunt, managing director of the Raymond James & Associates municipal bond department, was the most negative. He said he expected at the end of the bankruptcy recoveries at levels from 10 to 20 cents on the dollar. Delahunt declined to comment on whether Raymond James owned any Puerto Rico debt.

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