Trump Makes Gauging Puerto Rico Bondholder Losses Harder

Thursday, Oct 5, 2017

By Rebecca Spalding and Amanda Albright
Source: Bloomberg

Puerto Rico bondholders were already struggling to gauge how much they’d be repaid once the island finishes with its record-setting bankruptcy. Then President Donald Trump got involved.

The price of Puerto Rico bonds tumbled to a record low Wednesday after Trump said the beleaguered territory’s debt would need to be wiped out as it reels from Hurricane Maria’s devastation, seemingly endorsing a type of debt relief unprecedented in American history.

Puerto Rico’s general-obligation bonds due in 2035, the most frequently traded securities, fell to as little as 30 cents on the dollar -- down from an average of 46 cents a day earlier -- as investors and traders tried to parse whether the president wanted to, or even could, forgive what’s owed outright.

Those bonds rebounded to around 38 cents after the White House budget director said not to take Trump too literally. Still, some on Wall Street said his remarks could encourage Puerto Rico to push for deeper concessions in court.

"This strengthens their position to haircut this debt even further," said Nicholos Venditti, a portfolio manager with Thornburg Investment Management, who was inundated with emails about Trump’s comments.

Municipal bankruptcies are extremely rare, so even initially it was difficult for investors to handicap what the outcome would be as various bondholders stake rival claims on the island’s cash. The hurricane has made such forecasting harder by leaving billions of dollars of damage and causing the economy there to grind to a halt.

Thornburg, which doesn’t own Puerto Rico bonds, reckons recovery rates will be "terrible," less than even Wednesday’s rout suggests. Venditti said he thinks general-obligation bonds -- which have the highest claim on the central government’s revenue -- will be worth around 20 cents on the dollar.

Not all investors were quite so pessimistic. David Tawil, president and co-founder of Maglan Capital LP, which once held Puerto Rico debt, said the president’s comments pushed the bonds closer to their proper value by scaring off investors who had been hanging in there, hoping to recoup some of what they’ve already lost.

"The very important point is weak hands giving up," he said.

"I don’t think today’s comments changed anything substantively. There are investors however who rode this thing all the way down into distressed territory who were in over their heads," he said. "These statements have shaken those weak hands and now this investment may be priced right and may be getting into the right hands."

The market has learned not to take Trump "too literally," which is why prices bounced back somewhat, according to Triet Nguyen, managing director at NewOak Fundamental Credit. He thinks recovery rates on the general-obligation bonds will be around 30 cents on the dollar, though he said it’s possible the securities could trade in the 20-cent range before it’s over.

"It is kind of hard to be shocked by anything he says anymore," he said, adding that the comments were not that surprising considering the president’s previous use of bankruptcy in his business career. "He has never shown a lot of sympathy for creditors."

There are too many different moving targets to accurately predict recovery rates now, said Hernando Montero-Salazar, director of credit analysis for Stoever Glass & Co., which owns insured Puerto Rico sales-tax-backed bonds.

"Hurricane Maria changed everything," he said.

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