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Puerto Rico Bond Crisis Reaches “Point of No Return”

July 31, 2015 Blog

The next 24 hours are dire for investors in Puerto Rico bonds.

That’s because one of the island Commonwealth’s major debt issuers is about to default on a $58 million bond payment that is due Saturday, August 1.

In an article from Thursday afternoon titled, “Puerto Rico Risking Point of No Return With Debt Payment Default,” Bloomberg reporter Michelle Kaske outlined the likely chain of events over the coming days that will force Puerto Rico to restructure some of its $72 billion of debt.

Brace for Investment Losses

Mom and Pop investors who own the bonds should brace themselves for a severe hit to their portfolios. The default is historic, according to Kaske. It would be “the first default since Puerto Rico was ceded to the U.S. following the Spanish-American War,” she reported. “Government officials say they can’t make the payment because the legislature didn’t appropriate the funds last month for the current fiscal year.”
Prices of the Puerto Rico’s bonds are tumbling as officials prepare to release a debt-restructuring plan by Sept. 1, according to the report.

The default is the most significant event in the municipal bond market since Detroit failed to make a bond payment two years ago. “A non-payment would be the most notable since Detroit, which had about $8 billion of bonds, defaulted on $1.45 billion of insured pension bonds before it filed for bankruptcy in 2013 and then on more than $600 million of general obligation bonds,” according to a report from Reuters on Friday afternoon with the headline “Puerto Rico nears default as debt restructuring beckons.”

The default could have a cascading effect in the marketplace, as investors, worried about widespread defaults, dump their Puerto Rico bonds. “What could surprise investors is when they actually hear the word default, and that a default occurred,” one money manager told Reuters. “The immediate reaction might be a slight sell-off in the marketplace because I think people will start to anticipate, OK, what’s the next series of debt they’re going to default on?”

Whether Puerto Rico defaults may not be known until Monday because a payment falling on a weekend can be made on the next business day, according to Reuters.

Regular readers of this blog know that banks such as UBS and others pitched Puerto Rico bonds and Puerto Rico Bond Funds as safe, long-term investments with little risk.

The threat of default proves the opposite to be true. A money manager told Reuters, the default and eventual restructuring of Puerto Rico’s debt is “going to be a long process, a very long, drawn out process,”. “It’s kind of like watching the Titanic sink.”

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