Puerto Rico’s debt crisis
Puerto Rico’s debt crisis took another unpleasant turn. On Tuesday night (October 3rd), US President Donald Trump remarked that Puerto Rico’s debt may have to be wiped out, and that those holding it can wave goodbye. The news sent the island’s 8% GO Bonds (general obligation bonds) due in 2035 down to $0.37. The bonds had earlier traded at $0.52 on September 26 (after the Hurricane Maria), and at $0.44 on October 3rd. At their lowest point this week they were 60% lower than the price they were trading back in March 2014. The major companies that have insured Puerto Rico’s debt have also come under pressure this week.
Debt has been piling up
Over the years, Puerto Rico has borrowed heavily to invest in its energy infrastructure. In this time, US investors (SPY) (IWM) have continued to plow into Puerto Rican debt as it is exempt from federal or state income tax to residents of all 50 states. However, the money spent hasn’t yet realized its desired effect. The island still generates 47% of its electricity using petroleum, which costs the economy 21 cents per KWh as compared to 11 cents/KWh cost in mainland US where just 0.6% of electricity is generated from petroleum.
Puerto Rico currently has about $74 billion in debt that it says it cannot repay, 75% of which is held by retail investors. And, roughly $12 billion of the island’s debt is insured. While the island has been working to restructure its total of $120 billion in unfunded liabilities, the companies that insure the debt have been challenging the proposed restructure fearing substantial capital deterioration.
Insurers with substantial exposure stand to lose
MBIA Inc. (MBI), Ambac Financial Group (AMBC), and Assured Guaranty Ltd. (AGO) are the three main insurers of Puerto Rican debt. According to the global rating agency, Moody’s, AMBC and MBI subsidiary National Public Finance Guarantee Corporation have “substantial exposure” to Puerto Rico’s debt. National Public Finance has insured roughly $4 billion worth of the island’s bonds, while Assured Guaranty, across its subsidiaries, has insured roughly $5 billion. Stocks of MBI, AMBC, and AGO closed lower by 8.4%, 5.5%, and 2.9%, respectively, on Wednesday, October 4th.
ETFs exposed to Puerto Rico’s debt
Puerto Rico’s current economic plight has definitely made investors in the SPDR Nuveen S&P High Yield Muni Bond ETF (HYMB) wary of the holdings. The ETF tracks a market-weighted index of high-yield fixed-rate municipal US bonds with at least a year to maturity. It has about 9.32% of its portfolio invested in Puerto Rico’s bonds. Other ETFs with exposure, albeit less, to Puerto Rican debt include the VanEck Vectors Short High-Yield Municipal Index ETF (SHYD), the PowerShares New York AMT-Free Municipal Bond Portfolio (PZT), and the VanEck Vectors High-Yield Municipal Index ETF (HYD).