Skip directly to Accessibility Notice
  • Muni Nation

    Devastation in Puerto Rico Complicates Muni Market

    Jim Colby ,Portfolio Manager
    October 03, 2017
     

    Beyond the feeling of acute sadness for the Commonwealth and its populace, the devastation will only serve both to prolong and complicate the negotiations and underlying issues surrounding the default of Puerto Rico's outstanding obligations.

    Pretty much every aspect of everyday life on the island has been affected. It is very clear that a near-complete rebuild of the power supply system, under the aegis of the Puerto Rico Electric Power Authority ("PREPA"), will be required. The highway system, under the Puerto Rico Highways and Transportation Authority ("PRHTA") is barely holding itself together. The Puerto Rico Aqueducts and Sewers Authority ("PRASA") may need to rebuild totally the water and sewer system. And schools have suffered such damage that it is as yet unclear just how many can be salvaged. This is on top of the fact that many schools had already been closed due to the budget constraints across the island.

    The Federal Emergency Management Agency ("FEMA"), already stretched across the states of Texas, Florida, and the Florida Keys, is being forced to allocate, rather than dedicate, all its resources to Puerto Rico and the U.S. Virgin Islands. This only complicates further the prospects of near-term recovery.

    The one possible silver lining, which has not yet been publically discussed (as far as I know), is a recovery bill in Congress to hasten the rebuild and recovery of the islands' economy. Given the extent of the human suffering of these U.S. citizens, the possibility of swiftly privatizing essential services with U.S. government support is more possible now than it was prior to the hurricane.

    In the meantime, however, there appears little hope, near term, for any holders of Puerto Rico bonds who may choose to rely upon the contractually stated obligations under which the bonds were originally issued, to anticipate that repayment can or will proceed in the near future.

    For muni investors who have chosen to utilize the ETF structure as their way to obtain tax-free income, it should be clear that their choice of a highly diversified vehicle, built both to represent the broad landscape of the muni high-yield marketplace and with the intent of limiting risk associated with singular events such as this destructive hurricane, has been effective.

    In addition, since Puerto Rico has been a significant and large issuer in the high-yield universe, index rules that employ a "capping" mechanism have offered further investor protection by reducing overall exposure. Such a mechanism has helped mitigate the impact of a valuation reduction.

    As horrible as the outcome of the hurricane and subsequent recovery may be, the lesson for investors around their choice of deploying their assets through the auspices of the ETF structure has been a starkly real one.

  • IMPORTANT MUNI NATION®DISCLOSURE  

    This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

    VanEck does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service.

    Please note this represents the views of the author and these views may change at any time and from time to time. MUNI NATION is not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck. MUNI NATION is a trademark of Van Eck Associates Corporation.

    All indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a fund’s performance. Indices are not securities in which investments can be made.

    The Bloomberg Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year. The AAA and BBB indices are sub-sets of this broader index.

    Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.

    The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.

    Diversification does not assure a profit or protect against loss.

    Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of a fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.