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Straddling the Bermuda Triangle - Tuesday, 07/29/2014

Puerto Rico Electric Authority (PREPA)
At the risk of overstaying my welcome on this topic, I submit that Puerto Rico continues to dominate the landscape of municipal investing in curious ways. I will try to be succinct.



On the heels of the Moody's downgrade and negative July 1 outlook announcement for Puerto Rico Electric Power Authority (PREPA), the company's bonds traded as low as $37, only to rebound to a $45 bid by Friday, July 18. Its high was $47 on Tuesday, July 22 after it was announced that loan repayment obligations had been extended to the end of July. The benchmark Puerto Rico general obligation (GO) 8's (8% coupon bonds issued in March 2014 and maturing on July 1, 2035) were pushing closer to their original issue price of $93 on July 23 after trading as low as $84.25 on July 2.  

The financing arm of the Commonwealth, the Government Development Bank (GDB), held an investor call last Thursday during which no hard news was released on PREPA or any of the other public corporations. Despite the GDB's suggestion that it would only consider utilizing the provisions of the Recovery Act Law as a last resort, there is little doubt voiced by certain analysts that PREPA is likely to restructure its debt under the new act after month end. Evidence of the recent trading patterns seems to me to point to the notion that PREPA bonds have been squeezed out of weaker hands and into private equity and hedge funds that may be driving the negotiations going forward. Furthermore, two major mutual fund groups have filed suit alleging that the Puerto Rico Recovery Act Law is not constitutionally appropriate. This legal action is likely to muddy the waters come the end of the month and possibly delay a clear action or solution, immediate to the needs of the Commonwealth or PREPA.  

It is both interesting and curious that now the discussion and the direction of liquidity and viability of one of the largest issuers in the municipal marketplace are in the domain of the legal system, "straddling the Bermuda Triangle" waters between Washington, D.C. and San Juan. 

 

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