Free Special Report: Post-Election Puerto Rico – Systemic Risk Or High Yield Opportunity?

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Introductory Comments by Marc Joffe

Axios Advisors released an in-depth report on Puerto Rico bonds today, and it is should be required reading for anyone with exposure to the Commonwealth’s debt.

As the Axios report shows, Puerto Rico’s debt profile and prospects are sobering – far worse than any state. For example, the Commonwealth’s Debt to GDP ratio is 105%. Latest Census figures (as of FY 2010) show no US state exceeding a Debt to GSP ratio of 20%. Further, Axios reports that Puerto Rico’s five public employee pension systems have funding ratios of between 7% and 21% – also far worse than any US state.

Despite its enormous debt load, Puerto Rico does not appear to have high default risk. The Axios report concurs with the major rating agencies, all of which assign PR low investment grade ratings in the BBB/Baa range. While reaching a similar credit opinion, the Axios report contains considerable detail to enable readers to form their own views.

The Commonwealth can perform on its large stock of bonds due to today’s low interest rate environment. However, with a recent 10-year spread of 275 bps over Treasuries, it does not benefit as much from the Fed’s quantitative easing policies as other large municipal issuers. US states –even those that frequently receive negative press (like Illinois) – face lower rates than Puerto Rico.

The fact that the Commonwealth continues to perform and continues to earn an investment grade ratings shows just how safe state bonds are. Since every state faces lower interest rates and much lower levels of debt than PR, none face any material chance of default in the near to intermediate future.

One reason that Puerto Rico has accumulated so much debt is that it lacks a constitutional balanced budget amendment. PR has run operating deficits every fiscal year since 2002. A number of these annual deficits exceeded 10% of operating revenue. The Commonwealth’s debt mountain is testimony to the power of strong debt restrictions.

Views expressed are those of the writers only. Past performance is no guarantee of future results. Trading comes with severe risk. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
David Waring

David Waring

David Waring was the founder of LearnBonds.com and has been a major contributor to the extensive library of investing news and information available on the site. Until the launch of Learnbonds.com in late 2011 there was no single site on the internet catering exclusively to the individual bond investor. This was true even though more individuals own stocks than bonds. Learn Bonds was launched to fill that gap.

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