No matter how events unfold for Puerto Rico, unless the root of the problem—Puerto Rico’s economic challenges—is solved, bondholders are likely to face far more severe haircuts than what has generally been discussed to date.
There’s a lot of speculation over how events in Puerto Rico will unfold. Part of the reason has been the lack of transparency into their finances. Our view, is unless the root of the problem is solved, their economic challenges, investors are likely to face additional haircuts beyond what has been proposed.
The economic challenges are startling when you contrast those with what’s happened in the US over the last decade or so. The recent default, the July 1st defaults, confused many investors. With what was previously thought to be the safest form of debt, the general obligations bonds, defaulted. Some of the weaker forms of debt made partial payments but only because the reserve funds in those securities. Bonds are trading flat in the markets right now. Which means, there is a high probability in investor’s minds of never receiving those coupon payments.
Looking forward, more debt service owed August 1st. The financial control board is supposed to be in place by September 15th. We’re hopeful that will begin the process of improving transparency. But investors should not draw too much comfort from any overly positive headlines in the next few months because again, the root of the problem is the economy, and unless that is fixed, investors are likely to see additional haircuts beyond what has been recently proposed.