Caribbean News Now!

About Us Contact Us

Countries/Territories

Jump to your country or territory of interest

Advertise with us

Reach our daily visitors from around the Caribbean and throughout the world. Click here for rates and placements.

Contribute

Submit news and opinion for publication

Subscribe

Click here to receive our daily regional news headlines by email.

Archives

Click here to browse our extensive archives going back to 2004

Also, for the convenience of our readers and the online community generally, we have reproduced the complete Caribbean Net News archives from 2004 to 2010 here.

Climate Change Watch

The Caribbean is especially vulnerable to rising sea levels brought about by global warming. Read the latest news and information here...

Travel


Follow Caribbean News Now on Twitter
Connect with Caribbean News Now on Linkedin



News from the Caribbean:


Back To Today's News

Puerto Rico bonds decline following Recovery Act
Published on July 14, 2014 Email To Friend    Print Version

NEW YORK, USA -- Declines in pricing of Puerto Rico bonds added further pressure to already depressed net asset values (NAVs) of Puerto Rico mutual funds, according to Fitch Ratings. Fitch-rated Puerto Rico fund managers are reacting swiftly by adding to collateral supporting rated notes and deleveraging where needed.

Puerto Rico bond prices fell following the enactment of the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (Recovery Act) on June 26, which was followed by a series of ratings downgrades impacting government issuers across the commonwealth. The act establishes a restructuring regime for public corporations that may become insolvent.

Fitch Wednesday downgraded Puerto Rico sales tax (Cofina) bonds to 'BB-' from 'AA-' for senior and from 'A+' for subordinate issues, employee retirement system and commonwealth general obligation and guaranteed bonds to 'BB-' from 'BB', and aqueduct and sewer authority (PRASA) bonds to 'B+' from 'BB+'. Previously, Fitch downgraded electric power authority (PREPA) bonds to 'CC' from 'BB' (senior). Fitch does not rate debt issued by the highway and transportation authority (PRHWY).

The downgrade of the Cofina, PRASA and PREPA ratings reflected the commonwealth's action to change law to the detriment of bondholders with passage of the Recovery Act. The one-notch rating downgrade of the GO and related bonds was based on marginal deterioration in credit fundamentals despite recent actions designed to support the general credit.

The Recovery Act contemplates two procedures for public corporations to address debt obligations in the event of insolvency. While they are intended to restore solvency over the long term, both procedures entail debt restructuring that would trigger suspension of debt payments and preclude the timely payment of principal and interest during the proceedings. Entities covered by the act include PREPA ($8.6 billion of debt outstanding), PRASA ($4.6 billion) and PRHWY ($5 billion).

The recent events pushed Puerto Rico bond prices to record lows. PREPA bonds with a 5% coupon and 30 year remaining term fell 41% to $34 before rebounding to $39 as of market open July 11th. Similar term PRASA bonds fell 24% to $55 before rebounding to $60, and similar term PRHWY bonds fell 37% to $32 before rebounding to $34. Cofina bond prices gave up 25%, falling to a low of $59 before rebounding to $63, while GO bonds fell a modest 12% to $60 before recovering to $65.

Fitch-rated funds managed by UBS, Banco Popular and Santander (which operate within a $9 billion fund industry on the island) had minimum exposures to uninsured public corporation debt, owning less than $100 million in aggregate, and representing less than 4% of collateral that support Fitch-rated notes, as of mid-June 2014. One reason for the small exposure is that the public corporations issued debt mostly into the US tax designated '103' market, where Puerto Rico funds have abstained from investing due to smaller yields than local bonds.

However, exposures to Cofina and GO bonds in collateral accounts supporting the Fitch-rated notes were more material, averaging 30% and 19%, respectively as of mid-June 2014. The significant price declines put pressure on fund NAVs and increased fund leverage ratios higher, breaching the normal operating maximum of 50% leverage in several cases.

Additionally, Fitch's mark-to-market haircut on Cofina bonds that are pledged to support 'A' rated notes has increased 50% due to the downgrade below investment grade. Funds also rely on repo and margin loan facilities for leverage and generally these have seen raised haircuts and funding costs, although most have not pulled or decreased credit lines. Fund managers are responding with remedial action by topping up collateral and deleveraging the funds where necessary.

Overall, Fitch views the managers' response to these market conditions positively and mirrors actions they undertook in the summer and fall of 2013 when Puerto Rico bond prices tumbled on Fed rate hike and Detroit contagion. Significant breaches and lack of timely cures of minimum asset coverage requirements may cause Fitch to take negative rating actions, although this is not expected at this time.
 
Reads: 3375





Click here to receive daily news headlines from Caribbean News Now!



Back...

Comments:

No comments on this topic yet. Be the first one to submit a comment.

Back...

Send us your comments!  

Send us your comments on this article. All fields are required.

For your contribution to reach us, you must (a) provide a valid e-mail address and (b) click on the validation link that will be sent to the e-mail address you provide.  If the address is not valid or you don't click on the validation link, we will never see it!

Your Name:

Your Email:

(Validation required)

Comments:
Enter Code





Disclaimer
User comments posted on this website are the sole views and opinions of the comment author and are not representative of Caribbean News Now or its staff. Caribbean News Now accepts no liability and will not be held accountable for user comments.
Caribbean News Now reserves the right to remove, edit or censor any comments. Any content that is considered unsuitable, unlawful or offensive, includes personal details, advertises or promotes products, services or websites or repeats previous comments will not be approved.
Before posting, please refer to our Terms of Use and Privacy Policy.



Other Headlines:



Regional Sports: