Trump Claims Puerto Rico's Bond Debt Will Be 'Wiped Out,' Here's Who'd Lose Big

Puerto Rico bonds took a huge hit last week when President Trump suggested the U.S. government may eliminate the nation’s debt in wake of its ongoing financial crisis.

“They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out,” Trump said in an interview with Fox News. Puerto Rico currently owes $13 billion of general-obligation debt and $72 billion in total debt.

Related Link: Puerto Rico Wants To Become A State; Here's What That Means

The suggestion that bondholders could be the ones left holding the bag in Puerto Rico sent the price of the island’s general obligation bonds tanking to just 37 cents on the dollar last Wednesday, down from 56 cents a month ago.

Who Loses?

  • Here’s a look at some of the bondholders and bond insurers that could be hit hardest if Puerto Rico’s slate is wiped clean.
  • Assured Guarantee Ltd. AGO had a net par exposure to Puerto Rico of about $5 billion as of the end of June.
  • Ambac Financial Group, Inc. AMBC had a net par exposure of $2.1 billion as of the end of June.
  • The Baupost Group, managed by billionaire value investor Seth Klarman, recently disclosed that it owns nearly $1 billion in Puerto Rican debt. Klarman apparently doesn’t personally own any Puerto Rican debt. 
  • A group of hedge funds, including Aurelius Capital Management, Autonomy Capital (Jersey), FCO Advisors, Franklin Mutual Advisers, Monarch Alternative Capital, Senator Investment Group and Stone Lion, collectively owns $3.3 billion of Puerto Rican debt, according to new court documents. Autonomy Capital holds the most general obligation debt of the group at $937.6 million.

Little Guy The Biggest Loser

Everyday Americans, including individual bond investors and mutual fund investors, reportedly have the largest overall exposure to Puerto Rican debt. Puerto Rico Clearinghouse estimates that there are more than half a million individual Puerto Rican bondholders and hundreds of thousands of investors who own the bonds via funds such as the SPDR Series Trust HYMB, the Van Eck Vectors Short High-Yield Municipal Index ETF SHYD and the PowerShares New York AMT-Free Municipal PZT.

Time To Buy?

Surprisingly, some investors see Trump’s words as an opportunity to buy. Highland Capital co-founder Mark Okada said his $18 billion hedge fund is looking into the possibility of buying Puerto Rican debt on the cheap.

“I think people are overreacting to what Trump said,” Okada said last week.

MKM Partners analyst Harry Fong also sees opportunity for investors.

“The shares of the bond insurers are all down sharply today on Trump’s comments and, in our view, this could present an opportunity to acquire the shares at well below fair value,” he wrote. MKM maintains Buy ratings for Assured Guarantee and MBIA.

Related Link: Elon Musk Offers To Rebuild Puerto Rico's Energy Infrastructure

Image Credit: By Staff Sgt Michelle Y. Alvarez-Rea, U.S. Air National Guard (President Trump Visits Puerto Rico) [Public domain], via Wikimedia Commons
Posted In: Harry FongHighland CapitalMark OkadaMKM PartnersPuerto RicoSeth KlarmanAnalyst ColorLong IdeasBondsEducationFuturesPoliticsReiterationMarketsAnalyst RatingsMediaTrading IdeasGeneral

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