Is Puerto Rico Heading For A Crash?

If Puerto Rico bonds were a runaway train in some Hollywood thriller, by now they definitely would be heading straight for a collision.

First, Fitch Ratings, one of the key bond ratings agencies, cut its rating on Puerto Rico two notches deeper into junk territory near the end of March, “reflecting elevated concerns over the island’s ability to improve its liquidity cushion and willingness to repay its debt,” according to a recent Wall Street Journal report.

Fitch lowered Puerto Rico’s credit rating to B, which is five notches below investment-grade territory, from double-B-minus, according to the Journal’s report. The cut brings Fitch’s ratings in line with those from Standard & Poor’s Ratings Services, which lowered its ratings on Puerto Rico in February.

Even more troubling, the island commonwealth’s local politics have gone haywire, with the Government Development Bank (GDB) and elected officials now in opposition to a potential restructuring of some of Puerto Rico’s $70 billion in municipal debt.

Remember that, unlike most municipalities on the mainland, Puerto Rico is a U.S. territory and cannot file for bankruptcy as Detroit did in 2013 in an effort to reduce its debt.

With Puerto Rico lawmakers showing less willingness to pay central government and public corporation debt, yields on Puerto Rico’s general obligation bonds have ticked up to nearly 10% from 8.5% a year ago.

That’s definitely not good. Remember, yields on bonds rise as their prices, or value, fall.

One municipal authority, PREPA, Puerto Rico’s power utility, is already moving toward a record restructuring of its $8.6 billion debt load, according to Bloomberg.

And Puerto Rico’s general obligation bonds may also be at risk: there’s a high probability that the island will default on the securities in the next two years, Moody’s Investors Service said in a Feb. 19 report.

As Marilyn Cohen, CEO of Envision Capital, said on Monday in an interview with Bloomberg News: “This is going to be the biggest default we’ve ever seen.” To put Puerto Rico’s plight in context, it has $70 billion in municipal debt. That’s more than four times Detroit’s debt, which was $18 billion, she noted. “Seventy billion is a whole different animal,” she said. “This is going to be a seminal event.”

The continuous downgrades of Puerto Rican debt coupled with a potential restructuring is a train wreck for Puerto Rico bondholders.

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions. For more information about Zamansky LLC, please visit https://www.ubspuertoricofunds.com/.