dagblog - Comments for "Why you need to care about Puerto Rico's debt"

Why Puerto Rico?s bonds are

EmmaZahn — Mon, 03 Mar 2014 22:34:27 +0000

In reply to Why you need to care about Puerto Rico's debt

Why Puerto Rico’s bonds are moving to New York | Felix Salmon

Puerto Rico, which is already junk-rated and which is facing yet another downgrade to its credit rating, is in no position to call any shots when it comes to raising new debt. If it wants to borrow new money — and it looks like it wants to borrow a hefty $3.5 billion in the next few weeks — then it’s going to have to make whatever concessions its lenders want. That means paying a very hefty interest rate in the 10% range, of course. But it also means changing the governing law of the bonds, from Puerto Rico to New York.

... creditors in Puerto Rico aren’t looking for de jure seniority; they’re looking instead for de facto seniority. And the way to get that is to be part of a small group of bonds which is more trouble than it’s worth to restructure.

That strategy generally works very well. ... when Russia defaulted on its debt in the late 1990s, it defaulted on its large stock of domestic bonds, but stayed current on its much smaller stock of international-law bonds, for exactly the same reason.

So when you see hedge funds demanding that their new Puerto Rico bonds be issued under New York law, don’t kid yourself that they particularly value the protections that New York law gives them, or that they think that New York courts will allow them to recover most of their money in the event of default. Rather, they’re just hoping that Puerto Rico won’t bother defaulting on those bonds in the first place. And they might well be right about that.

Oh, and likewise for your

artappraiser — Tue, 18 Feb 2014 02:02:17 +0000

In reply to In search of answers to other

Oh, and likewise for your first comment, a great short explanation of wassup with that.

Our unincorporated organized

artappraiser — Tue, 18 Feb 2014 01:58:19 +0000

In reply to In search of answers to other

Our unincorporated organized and unorganized territories are strange and mysterious things to most of us. That's owing in part, I think, to the fact that they were not included on those salt maps we all made in the fifth grade?

One of my favorite Richard Day stories was about a Puerto Rican client he once had who challenged a judge who had talked to him as if he weren't an American citizen.

In search of answers to other

EmmaZahn — Mon, 17 Feb 2014 23:47:17 +0000

In reply to Why you need to care about Puerto Rico's debt

In search of answers to other questions about this story, I fell into a rabbit hole for half of today. Ended up with even more questions and learned some interesting things about Puerto Rico.

So thanks for posting this.

Yes.

Peter Schwartz — Mon, 17 Feb 2014 04:11:58 +0000

In reply to Found this when I googled to

Yes.

Found this when I googled to

EmmaZahn — Sun, 16 Feb 2014 09:46:04 +0000

In reply to Why you need to care about Puerto Rico's debt

Found this when I googled to find out who were the underwriters of these PR munis. It is from last November and the author is hardly unbiased but it does have some interesting information:

How Wall Street Has Profited From Puerto Rico's Misery - Forbes

....The Street’s endless thirst for underwriting fees and brokerage commissions has brought the municipal bond market in Puerto Rico to the brink.

The Wall Street Journal recently reported that in 87 bond deals since 2006, Puerto Rico sold $61 billion of bonds which resulted in fees to Wall Street firms and their cohorts of $1.4 billion. The fees charged were higher than those assessed on other financially troubled US states and cities. In fact, according to Reuters, banks such as UBS, were paid gross spreads averaging 31% higher than spreads charged to Detroit.

UBS, one of the major underwriters of Puerto Rican debt, not only charged fees to underwrite Puerto Rican bonds, they then neatly packaged these bonds into their own “closed end mutual funds”, charged retail investors a “front end load” of 4.75 % and annual fees of 1%.

...hedge funds with enormous resources and great research capabilities, are buying Puerto Rican bonds for their portfolios at discounts of 30% to 50% of par value. According to the Wall Street Journal, an investor call hosted by the Puerto Rican Government Development Bank drew 1200 participants, “an unusually large number for a municipal – investor presentation”.

“Hedge funds are making a large bet on municipal debt, bringing aggressive tactics to a $3.7 trillion market long known as humdrum,” according to a report in today’s Journal by Michael Corkery and Matt Wirz. “The strategies include demanding high interest rates in return for financing local governments, buying the debt of struggling municipalities on the cheap, and trying to profit on rising volatility as many mom-and-pop investors who have dominated the municipal-bond market for decades flee amid deepening fiscal problems in many U.S. cities and states.”

The mom and pop investors who fled the bonds have already taken their losses; Puerto RIco's credit rating is now junk; insanely speculative hedge funds are the present owners of the debt and would be the beneficiaries if that $2 billion tax credit is used to pay muni interest.

Pfffft. Let Puerto Rico default.