Puerto Rico has, once again, garnered the attention of the municipal bond market. On March 13, Standard & Poor’s downgraded Puerto Rico G.O. bonds to BBB-, just one notch above “junk bond” status. Moody’s already made a similar move back in December 2012.
Axios Advisors, LLC has recently released a new municipal bond research report on Puerto Rico, providing commentary on recent developments that could have an impact on the bonds’ credit quality and market performance.
The municipal bond market pays particular attention to Puerto Rico paper, in part, because it is so widely held that its performance could pose “systemic risk” to the market, according to Triet Nguyen, Managing Partner of Axios Advisors, LLC.
In addition, Puerto Rico bonds are closely treading the investment grade line. “Based on credit spread, Puerto Rico paper is currently trading in the junk bond/high yield range, causing trepidation among many market participants,” says Nguyen. Puerto Rico bonds are also unique due to their triple tax-exempt status.
In December, Axios Advisors released an in-depth report examining the credit risks associated with Puerto Rico’s bonds. At the time, despite the pervasive doom-and-gloom prognostications of other market participants, Axios took a more balanced approach, exploring Puerto Rico’s inherent credit threats as well as factors that mitigate its credit risks.
Triet Nguyen and Carol Karsten, the report’s co-authors also pointed out that Puerto Rico debt was already trading as “junk bonds,” based on credit spreads. Many muni investors must have agreed with that assessment: since the beginning of the year, the Commonwealth’s bonds have returned 3.33 percent according to Barclays, compared to an average 0.72 percent for the market in general.
Karsten and Nguyen have now released an updated report on Puerto Rico in light of several recent developments that could have a significant impact on the bonds’ performance in the market.
Whether Governor Alejandro García Padilla’s recent pension reform proposal will be adopted remains to be seen, but Karsten and Nguyen view its introduction into the dialogue as a step in the right direction for Puerto Rico’s economy. The initial reaction to the proposal has been cautiously positive.
Puerto Rico’s healthcare system may also be restructured, as it recently announced that it will be considering adopting a single-payer system. If this plan is implemented, Puerto Rico would be the first in the country to shift to this structure. This is another potential risk factor that has not been well-covered by street analysts to date.
The update report continues the analysis of the technical aspects of Puerto Rico’s bonds and their market trends, as well as recent political and economic issues that may impact their future performance.
Copies of the updated report can be ordered from Axios Advisors. Please contact info@axiosadvisors.com for details.