RESEARCH: Puerto Rico bonds have been ‘Trumped’ – Analyst Snapshot - Debtwire

RESEARCH: Puerto Rico bonds have been ‘Trumped’ – Analyst Snapshot

04 October 2017 - 12:00 am

Of the many things that have taken the municipal bond market by surprise in the last 10 years, none quite compares to President Trump’s comments last night to the effect that Puerto Rico’s debt would have to be “wiped out”.


The president made his comments after recently viewing the island’s devastation and while still in San Juan. It’s understandable that the idea of total or partial debt forgiveness would be on his mind, especially given his past comments about the national debt.


But because debt negotiations are under the control of the federally-created Financial and Oversight Board for Puerto Rico (FOMB) and the federal court system, the president has no direct authority to dictate the outcome of debt negotiations. He can only remove FOMB members for cause, and there’s no apparent appetite on the part of Congress to impeach Judge Laura Taylor Swain, who’s in charge of the court proceedings.


The president does however have a bully pulpit and has apparently decided to use it to change the terms of the debate surrounding repayment of Puerto Rico’s debt. More specifically, the president seems to think that Puerto Rico bondholders should be prepared to accept losses that far exceed pre-hurricane expectations. One of his goals may be to prevent accusations that any proposed federal aid for Puerto Rico will be used to indirectly benefit bondholders. He’s also aware that a dollar that goes to bondholders can’t go to recovery efforts.


The following are Puerto Rico’s borrowers who have been designated by the FOMB as “Title III” entities, a designation that in effect places the borrower in federal bankruptcy court:




Each borrower above, with the exception of the Employees Retirement System, has defaulted on bond principal.


Analyst Takeaway: President Trump’s threat to effectively reduce bondholder recoveries to zero carries no legal authority or likelihood of occurrence.


But the combined effect of hurricane damage and the president’s comments have resulted in record low bond prices, as indicated in the chart below, for GO, PREPA, and PRHTA bonds.


These price declines may have shifted, to the detriment of bondholders, the debate regarding reasonable recovery levels. Prices may recover to some extent but not to the level that preceded the president’s comments.