Puerto Rico 8% coupon bonds issued last month in the island’s historic $3.5 billion junk deal plunged to new low prices late Friday.
The general obligation bonds, which mature in 2035, traded as low as 86 cents on the dollar, compared with 96.6 cents the day the bonds became free to trade in the secondary market. Yields rose as high as 9.29%, up 23 basis points from Thursday, according to Bloomberg data.
Many market participants were taken aback by the move, as other actively Puerto Rico bonds - including GOs, PREPAs and COFINAs - traded steady to stronger throughout the day.
The steep decline in value of the new bonds Friday could be a sign of bondholder response to poor liquidity in the market. Hedge funds that bought the bonds may have realized the difficulty in selling in a relatively illiquid market and chose to exit their positions as the bonds weakened, traders said.
"A drop like this in a day smells like liquidity to me," one managing director based in Philadelphia said in an interview. "If you were a hedge fund and you're not in the muni market all the time, and you go to sell and there's no bid? Nothing deteriorates price more quickly than lack of liquidity."
Of 265 buyers on the initial sale, more than 75% were nontraditional muni buyers such as hedge funds, one trader familiar with the buyer list said.
Selling pressure on the new bonds may have come from crossover buyers like hedge funds who looked to exit their positions as stocks slumped, traders speculated. Trading volume on the bonds was more than twice the daily average, according to Bloomberg.
"Perhaps they're selling Puerto Rico to cover some backup in equities," one trader in Virginia said in an interview.
U.S. stocks fell in the past week, with the Dow Jones Industrial average losing 2.35% by market close Friday. The S&P 500 Index declined 2.65% on the week.
"I just think it's hedge funds and flippers not being able to flip like they thought," one trader on the west coast said in an email. "In a down stock market they probably need the cash to cover other trades."
Reports from earlier in the week that Puerto Rico's Government Development Bank had retained restructuring advisors probably weren't responsible for the negative price movement today, market participants said. The island retained Cleary Gottlieb Steen & Hamilton, which has expertise in financial restructuring, the firm confirmed to The Bond Buyer Tuesday.
"They had obtained some restructuring attorneys but that seems like it would've flooded through earlier," the Virginia-based trader said.
