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According to The New York Times, "[A] new law [proposed by the government of Puerto Rico] intends to create an organized process through which some of its debt can be cut or reduced. It would apply to at least $22 billion owed by public corporations including the electric authority, the aqueduct and sewer authority, and the highway authority. The legislation does not apply to Puerto Rico's general obligation debt, which officials say carries constitutional protections that bondholders must be repaid."
Yesterday, on that news, the debt of those authorities saw the bid-side of the market sink 3-5 points ($ price), depending upon the size of the block being offered, while the recently issued Puerto Rico general obligation (GO) 8's (8% coupon bonds, issued in March 2014 and maturing on July 1, 2035), which are very actively quoted, rose some 3 points ($ price) to $88.25. This morning these bonds were being quoted from $88.625 – $89.125.
After many months of the Commonwealth fending off suggestions that it was going down a path toward some sort of restructuring, this news could seem to be a game changer. We now must wait to see what the Legislature does with the proposal and if the Puerto Rico courts might have a say in the outcome. It could also be fair to say that this is evolving out of an environment that is challenging economically as well as politically.
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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.
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