More trouble for Puerto Rico — debt restructuring

Puerto Rico has approved legislation allowing some public agencies to restructure their debt. The largest issuers that the new legislation affects are Puerto Rico Electric Power Authority (PREPA), Puerto Rico Highways and Transportation Authority (PRHTA), and Puerto Rico Aqueduct and Sewer Authority (PRASA). These three public corporations have approximately $19 billion in debt outstanding, with the largest being PREPA at $8.8 billion.

This legislation now relieves the Commonwealth of Puerto Rico and the Puerto Rico Government Development Bank (GDB) of providing support to these government agencies. This renders these agencies more likely to be unable to pay their debts in the near future. In a debt restructuring, bondholders or monoline insurance companies (such as MBIA and Assured Guaranty) backing the debt will most likely receive a haircut. For example, PREPA bonds maturing in 2040 are now trading at 44.5 cents on the dollar.

It is important to note that we do not hold any exposure to these bonds, nor do we have any exposure to the Commonwealth of Puerto Rico General Obligation bonds or to the Sales Tax bonds issued by the Puerto Rico Sales Tax Financing Corporation (COFINA).

(Data: Bloomberg)

Investing involves risk, including the possible loss of principal.

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer's ability to make interest and principal payments on its debt.

Funds that invest primarily in one state may be more susceptible to the economic, regulatory, and other factors of that state than funds that invest more broadly.

The views expressed represent the investment manager's assessment of the market environment as of June 2014, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the investment manager's current views.

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Notes from the desk