What Puerto Rico’s Downgrade Means for Investors

By
A A A

178538103

Puerto Rico has been making headlines for months. Yesterday, the clincher finally appeared: S&P downgraded the island's debt to "junk" status. What does it mean for the municipal bond market? After all, given the triple-tax-exempt status of Puerto Rico bonds, they are widely held by muni investors across the nation.

The answer may surprise you: We don't expect it will be very meaningful to the broader market at all.

The downgrade was not at all unexpected. As I alluded to in my November blog post , there has been a large disconnect between the rating agencies' assessment of Puerto Rico's debt and the market's view. In fact, Puerto Rico bonds have been trading as non-investment grade since last summer, so the new BB+ rating is actually a better reflection of the island's credit profile and pricing.

Whereas the broader municipal market was down 2.55% last year, Puerto Rico was down 20.47%. Clearly, investors had taken notice. Many actually sold down their positions over the course of the summer and fall, giving those that hung on ample time to position for the downgrade.

In addition, S&P Dow Jones last month made the decision to remove all U.S. territories (including Puerto Rico) from its investment-grade indexes, indicating they no longer meet the objectives established for those indexes. This required investment-grade index products to sell their Puerto Rico exposure, which effectively alleviates forced selling in the aftermath of the downgrade.

What Next?

Puerto Rico remains on review for downgrade by Moody's and Fitch, and the next month could see action from either or both agencies. Regardless of the rating, the grim facts around Puerto Rico's economic, fiscal and demographic state are clear. While we applaud the administration's efforts to free up liquidity and aid the ailing pension system, a restructuring may be unavoidable. In fact, the island will need to borrow relatively soon to meet its obligations, and it may well find it difficult or impossible to access the market for financing. That may dictate whether Puerto Rico buys some additional time or finds itself pressed into a restructuring.

Ultimately, Puerto Rico's troubles have been well telegraphed and largely priced into the market, underscoring our call for minimal downgrade-related ripple effects.

As always, we would point to thorough credit research as the lynchpin to effective decision-making in today's municipal market . There are big disparities across credits and issuers, even in Puerto Rico. It's critically important to know what you own, and to know what to avoid.

Peter Hayes, Managing Director, is head of BlackRock's Municipal Bonds Group and a regular contributor to The Blog. You can find more of his posts here.

Sources: BlackRock, S&P Indices



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Economy

Referenced Stocks:

BlackRock

BlackRock

More from BlackRock:

Related Videos

Stocks

Referenced

Most Active by Volume

74,388,887
  • $102.4237 ▲ 2.67%
63,496,557
  • $13.03 ▼ 6.93%
57,520,686
  • $16.57 ▲ 1.91%
40,687,100
  • $40.50 ▼ 6.44%
38,788,366
  • $96.63 ▲ 2.37%
32,151,319
  • $9.29 ▲ 1.42%
29,018,166
  • $30.98 ▲ 4.34%
26,123,015
  • $40.06 ▲ 1.99%
As of 10/21/2014, 03:01 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com