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More Puerto Rico Debt On The Way

February 20, 2014 Blog

Puerto Rico officials confirmed Tuesday on a conference call what many in the municipal bond market had been anticipating; it will return to the market with the intention to sell close to $3 billion of debt in March.

The market will be closely watching this bond offering, as the proceeds will be used to shore up the Puerto Rico’s finances. That means refinancing outstanding debt and repaying credit lines.

“Officials of the Government Development Bank said the March borrowing would be the territory’s last during the current fiscal year, which ends on June 30,” according to a report by the New York TimesMary Williams Walsh and Michael Corkery. “They also said this would be the last time the commonwealth would borrow to balance its budget, a practice that cannot be sustained in the long run.”

At first blush, this sounds well and good. Puerto Rico needs to get its fiscal house in order. But Puerto Rico is in a perilous juggling act. How much debt can it issue until it fails to meet its obligations and pay bondholders? How many chainsaws or flaming pikes can a juggler keep afloat, thrilling the circus crowd, before they all come dangerously crashing down?

While it looks like the hedge funds have figured out how to navigate the Puerto Rico bond market, what will happen to the Mom and Pop investors that were pitched these supposed safe and steady bonds? As Mary Williams Walsh and Michael Corkery pointed out, “these hedge funds and other alternative asset managers believe they see ways of protecting themselves in the face of increasing risk that Puerto Rico’s other debt will have to be restructured at some point. But holders of Puerto Rico’s outstanding municipal bonds fear that special protections for the new lenders will push their own holdings back a place in line”.

Municipal bond fund investors have plenty to worry about, according to Tim McLaughlin of Reuters.

“Some investors in OppenheimerFunds may be exposed to more uncertainty than they bargained for: The company has ramped up holdings of Puerto Rican debt in two of its lower-risk municipal bond funds, even as much of the U.S. mutual fund industry reduces its exposure to the island’s newly junk-rated debt.”

Puerto Rico bonds are teeming with risk, yet some investment companies are willing to expose Mom and Pop investors to this turmoil. Muni bond investors deserve better.

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/.

 

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