Investors in Puerto Rico municipal bonds have seen huge losses in their accounts over the past few months, but investors in distressed debt are seeing dollar signs. Distressed debt or distressed securities are stocks or bonds of companies or municipalities that are in default, under bankruptcy protection, or at a high risk of defaulting or filing for bankruptcy.
Institutional investors who are looking for a bargain and are willing to stomach substantial risk are attracted to distressed debt. Oftentimes, the institutional investors believe the entity’s situation is not as dire as the market believes, and the company will rally or there are enough assets so that in the event of liquidation, the amount of the original investment will be returned.
Typically, buyers of distressed debt tend to focus on corporate, rather than muni debt. According to the Daily Business Review, Wall Street banks have been pushing Puerto Rico municipal bonds, currently rated one-level above junk bonds, to distressed-debt hedge funds and other institutional investors. The Daily Business Review claims that Citigroup, Morgan Stanley, and Lazard Capital Markets have made private presentations in the past month to investors concerning investing in Puerto Rico municipal debt.
Puerto Rico municipalities have double borrowing since 2004. The Puerto Rico municipal bond market has lost about 15.6% this year, its worst performance since 1999, according to Standard & Poor data. That, combined with Puerto Rico Governor Alejandro Garcia Padilla’s efforts to revive the island’s economy, has drawn distressed debt investors to the island’s municipal debt.
The desirability of Puerto Rico distressed debt to this new category of investors has helped to stabilize the $70 billion market for Puerto Rico municipal bonds. Puerto Rico’s financial health impacts more than just Puerto Rico. Recent data shows that approximately 75% of muni bond funds in the United States hold some portion of Puerto Rico municipal bonds because of the bonds’ tax exempt status nationwide.
The U.S. Department of the Treasury’s Acting Deputy Secretary and Under Secretary for Domestic Finance, Mary Miller, recently remarked at the Bloomberg Link State and Municipal Finance conference that, at present, the United States is not planning any significant financial assistance to Puerto Rico.
More information about Puerto Rico municipal bonds can be found here.