Puerto Rico muni bonds: A contrarian viewFollowing a yield spike, investors may want to look into investments issued by the commonwealth

{AGP en forma caprichosa e irracional ha hecho todo lo posible por quebrar a Puerto Rico y lo está logrando. Regaló Millones a Ricky Martin, UPR, Empleos Ahora y a sus Amigos. Aumento en $710 Millones los gastos en el Gobierno y $1.4 Billones en Taxes. Botó a los Pro-Americanos que trabajaban y multiplicó empleos a los Chavistas y Batateros improductivos, paralizando el Gobierno. Su palabra no vale. Se acerca el desplome total. Una pena, lo peor está por venir.}

Puerto Rico muni bonds: A contrarian viewFollowing a yield spike, investors may want to look into investments issued by the commonwealth

September 29, 2013 – 12:01 am EST
Our perspective stands at odds with the rash of negative headlines and articles about Puerto Rico and its economy that have appeared in recent months. The media coverage largely has added very little to the conversation and has, at times, offered up misleading and even erroneous information.

Yes, the Commonwealth of Puerto Rico has struggled to recover from a long and severe recession, but it is recovering. The government has taken dramatic steps to fix its balance sheet, and we think that forecasts a much brighter future.

In the past two years, Puerto Rico and the Government Development Bank have pursued initiatives to shore up the credit quality of all types of on-island borrowers.

For example, they have:

* Decreased their budget deficit and deficit financing significantly to an anticipated shortfall of $800 million in fiscal 2014, from $3.3 billion in fiscal 2009.

* Increased tax revenue by nearly $1.4 billion annually by changing corporate sales and use taxes.

* Strengthened their tax collection processes to the benefit of holders of general-obligation and government appropriation debt. As of July, general-fund revenue was $43 million above budget.

* Improved year-over-year sales tax collections by 8.4% in July, to the benefit of holders of sales-tax-backed bonds.

* Enacted comprehensive and sustainable pension reforms, with measures that eliminate an annual $900 million shortfall, increase the retirement age, require bigger employee contributions, cut bonuses and merit pensions, and convert lump-sum pension payments to annuity payments.

* Raised Puerto Rico Aqueduct and Sewer Authority rates by 60%, which will increase the authority’s revenue by nearly $300 million annually after nearly 20 years of flat rates.

Our investment team has researched Puerto Rican credits and invested in the island’s muni bonds for decades. The fiscal conditions on the island are better than we have seen in the past six years.

The government has been willing and able to honor its debt consistently, and that has been true no matter which party held power.

Time and again, Puerto Rican officials have given every indication that the word «default» isn’t in their vocabulary.

For those not yet ready to ignore the highly negative headlines about Puerto Rican debt, consider these facts:

* The constitution of Puerto Rico protects general-obligation and guaranteed debt issued by the commonwealth with a first lien on revenue. This means that bondholders get paid first, before pensioners and government employees and officials.

* Puerto Rico and its municipalities can’t file for Chapter 9 bankruptcy. That option exists only for municipalities located in a state that allows for muni bankruptcy filings. A state can’t declare itself bankrupt, and neither can the municipalities of any U.S. territory.

Finally, the fact that bonds issued by Puerto Rico and its authorities are triple tax-exempt – that is, exempt from federal, state and local income taxes – shouldn’t be overlooked.

In combination, current pricing levels and tax rates are delivering very handsome after-tax income for yield-seeking investors. Those in the nation’s highest tax brackets, for example, will pocket twice as much income from their tax-exempt holdings as they will from a taxable investment with the identical yield.

Investors haven’t been well-served by all the one-sided, negative and rehashed discussions that we have heard of late. Lost in the noise are the important strides that the commonwealth and the Government Development Bank have taken to ensure their continuing ability to meet their financial obligations.

The commonwealth has never defaulted on the payment of principal or interest on any of its debt, and while past performance doesn’t guarantee future results, we don’t expect that stellar track record to change in the near or distant future.

These facts should help investors look at both sides of the Puerto Rico debate. Informed decisions require facts and shouldn’t be based on negative headlines.

An understanding of the risk/ reward trade-off can help investors decide whether Puerto Rico munis, given their attractive yields and tax advantages, belong in their portfolios.

Dan Loughran is a senior portfolio manager and senior vice president at OppenheimerFunds Inc.

http://www.investmentnews.com/article/20130929/REG/309299983?template=printart

Puerto Rico’s bond losses hit local investors

7:59am EDT

Sept 29 (Reuters) – The steep decline in prices of Puerto Rican bonds on the American municipal bond market is taking a heavy toll at home, where local institutions and individuals own an estimated 30 percent of the $70 billion of outstanding bonds.

Heightening worries in recent months about Puerto Rico’s shrinking economy, double-digit jobless rate and per capita debts far higher than in any U.S. state touched off a wave of selling and briefly pushed some Puerto Rico yields to over 10 percent.

The yield on Puerto Rico’s general obligation 30-year bond hit a recent peak of 8.58 percent, up from 5.49 percent on June 30. The steep drop in prices, which move inversely to yields, has hit local banks and closed-end and mutual funds marketed to bond buyers in Puerto Rico. Some of the Caribbean island’s bonds fell to as low as 60 cents on the dollar.

Attorneys specializing in securities industry cases estimate losses tied to the sell-off of as much as hundreds of millions of dollars for the year, though Financial Institutions

Commissioner Rafael Blanco said it was «impossible» to accurately tally the damage.

The Financial Institutions Commissioner does not track the substantial investments made by island residents through state-side brokerages, nor the holdings of insurers or pension funds.

Local attorney Harold Vicente, who said he is preparing arbitration action against UBS Puerto Rico on behalf of 15 or more clients, said an initial review showed losses among his clients of «tens of millions of dollars.» Some retirees, he said, were «totally wiped out.»

UBS Puerto Rico is the island’s market leader in closed-end funds, operating more than a dozen. Its Tax-Free Pu

erto Rico Fund Inc. had a net asset value of $5.242 on Sept. 18, down from $6.73 on Sept. 4 and $9.55 on Jan. 31.

Santander Securities and Popular Securities also run closed-end funds with Puerto Rico bond holdings that suffered losses.

PPD No Sirve

Many Puerto Ricans invest in the island’s debt through closed-end mutual funds, which in several cases held more than 70 percent of assets in Puerto Rico bonds and employed leverage that magnified this month’s losses.

Vicente said he would file cases on behalf of the investors with the arbitration unit of the Financial Industry Regulatory Authority, Wall Street’s industry-funded watchdog, where investors must typically resolve disputes with their brokerages.

Vicente said the cases would allege that the amount of leverage involved was clearly «an unsuitable investment strategy» for his clients.

Brokers must recommend investments that are suitable based on age, risk tolerance and other factors.

UBS spokeswoman Karina Byrne said investors in the UBS funds were regularly apprised of the financial risks through periodic statements.

In addition, she said, Puerto Rico government rules require that two-thirds of the securities in its local tax-free funds be Puerto Rico securities in order for an investor to earn a local tax exemption.

«General weakness in municipal markets across the U.S. and Puerto Rico, and apprehension about the direction of interest rates, have led to steep declines in Puerto Rico municipal bond and closed-end fund prices and a lack of liquidity for these securities,» Byrne said.

Byrne said the recent volatility of the municipal bond market caused both «losses and unrealized losses» among closed-end mutual fund investors, but would not provide estimates because the firm was still gathering information.

Attorney Jeffrey Erez, who estimated losses at «hundreds of millions of dollars,» said many fund investors also used leverage to buy shares of the fund and were especially hard hit.

Shares in the funds have become illiquid, said Erez, whose firm Miami-based firm Sonn-Erez has teamed up with island firm Aldarondo & López Bras to advise investors on potential legal remedies.

Banks in Puerto Rico reported $533 million in Puerto Rico government bond holdings as of Aug. 31, according to the Office of the Financial Institutions Commissioner. Puerto Rico assets, including sizeable holdings of Puerto Rico bonds, held by mutual funds were $9.2 billion on Aug. 31, down from $11.4 billion a year earlier, according to the commissioner’s office.

http://www.reuters.com/article/2013/09/29/puertorico-bonds-locals-idUSL2N0HM26D20130929