Posted by on May 15, 2017 4:49 pm
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Categories: AllianceBernstein Americas Argentine debt restructuring Avenue Capital Bond Book Value Business Congress Creditors detroit Economy goldman sachs Goldman Sachs Asset Management Morningstar Puerto Rican government-debt crisis Puerto Rico recovery Ricky Rosselló Spanish Empire Supreme Court Tax Revenue U.S. court UN Court

In the aftermath of Puerto Rico’s historic bankruptcy, a clearer picture of losses accrued by U.S. mutual funds on their holdings of Puerto Rican debt is beginning to emerge: the WSJ has calculated the red ink at as much as $5.4 billion over the last five years on total holdings of $14.6 billion.  Wall Street’s paper of record lists the funds who have piled up losses, both realized and unrealized, on the trade. These include: Franklin Resources, Oppenheimer, Vanguard, Goldman Sachs Asset Management, Western, Lord, Abbett, AllianceBernstein and Dreyfus.

Of these, Franklin and Oppenheimer are the biggest losers, according to Morningstar data cited by the Journal. Oppenheimer has lost as much as $2.1 billion, and Franklin as much as $1.6 billion. That’s compared with AUMs of $230 billion and $741 billion, respectively.

Meanwhile, six other fund families managed by Vanguard, Goldman, Western Asset, Lord Abbett, AllianceBernstein Holding and Dreyfus have racked up between $100 million and $200 million in losses each.

Of course, in the grand scheme of the funds’ AUMs, the losses so far are negligible, so before retail investors assume that Meredith Whitney’s prediction is finally coming true, resulting in another muni fund panic, it is worth recalling that all these funds have at least $100 billion each in muni-bond assets under management.  Furthermore, these investors are likely in better shape than some of their hedge fund colleagues as the damage done to mutual funds, and by extension the retirees and middle-class savers to which they cater, will be an important factor in the court-mandated restructuring of the island’s debt, which begins Wednesday with a hearing in San Juan.

As a reminder, earlier this month, the island’s governing body petitioned for – and its federal oversight board approved – its own version of bankruptcy protection under Title III of a rescue law passed by Congress late last year. 

The mutual funds will have a greater incentive to agitate for maximum recovery especially since they purchased debt closer to par values.  Mutual funds were the most heavily invested in Puerto Rican debt, tempted by attractive yields – 8% at the last issuance of GOs in 2014 – along with an exemption from federal taxes.

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Meanwhile, Bloomberg reports that as the island’s restructuring progresses, creditors of Puerto Rico’s insolvent government development bank today agreed to accept losses by exchanging their bonds for new securities, moving the island another step toward restructuring its crushing debt load. Under the agreement, bondholders would exchange their debts at 55 percent, 60 percent or 75 percent of face value, depending on whether they elected to receive higher interest payments or the prospect of a greater recovery through debt with less legal claim to the bank’s cash, according to terms disclosed in a bond filing.

The deal comes less than two weeks after Puerto Rico initiated bankruptcy-like proceedings, giving it power to have debts dismissed in U.S. court if creditors don’t voluntarily agree to accept less than they’re owed. Puerto Rico has already reached a similar agreement with creditors of the government electric company and officials have said they intend to continue negotiating with investors.

“This agreement is an example that the government is regaining the credibility it had lost over the past few years,” Rossello said. “We are satisfied with this agreement.”

Debt could be issued for first-lien bonds at 55 percent of par with 7.5 percent coupons, or 60 percent of par with 5.5 percent coupons. Those electing for subordinate bonds would get 75 percent of par and coupons of 3.5 percent. New issuer will receive assets of GDB, with a book value of $5.3 billion.

Despite the enforced bondholder haircuts, the agreement would allow creditors to recoup more of their investment than current trading prices suggest. Government Development Bank bonds due in August traded Monday for an average of 24.3 cents on the dollar.

The negotiation has a long way to go: Governor Ricardo Rossello said at a press conference Monday that 45% of bondholders have so far consented to the restructuring. Under the federal emergency rescue law that allows for Puerto Rico to legally cut its debts, any voluntary agreement must be approved by a two-thirds vote of bondholders.

Today’s deal included the so-called ad hoc group, comprised mostly of hedge funds managed by Avenue Capital Management, Brigade Capital Management, Fir Tree Partners and Solus Alternative Asset Management, as well as local bondholders.

And speaking of hedge funds, as we documented previously, here’s a rundown of the other biggest losers, which include a handful of hedge funds and bond insurers – not to mention the Puerto Rican people, about half of whom live in poverty and will likely be forced to cope with cuts to basic services mandated by an austerity regime not unlike those seen across Europe.

  • General Obligation bondholders include: Aurelius Capital Management, Autonomy Capital and Monarch Alternative Capital LP,
  • Sales tax revenue-backed (Cofinas) bondholders: Scoggin Capital Management, GoldenTree Asset Management, Merced Capital, Tilden Park and Whitebox Advisors have held Cofinas.
  • Bonds insurers: roughly $12 billion of the island’s $70 billion in outstanding debt is insured. It will be up to the bond insurers to fill the gap when interest and maturity payments are missed. Insurers backed a wide swath of bonds from Puerto Rico, complicating the island’s ability to prioritize payments. Among the companies with the biggest exposure to Puerto Rico debt include Ambac Financial Group, National Public Finance Guarantee Corporation, Assured Guaranty Ltd. and Financial Guaranty Insurance Company.

PR’s constitution requires the government to pay back GO bondholders in full, and the island has already offered a restructuring that favored GO bonds, over COFINAs, which are backed by tax revenue. However, other recent municipal bankruptcy cases have seen GO investors accept huge losses, according to data from Moody’s Investors Service.

  • In Harrisburg, Pennsylvania, bondholders took a 25 cents on the dollar haircut
  • In Stockton, California, the haircut was 50 percent.
  • In Detroit, where pensioners suffered losses of about 18 percent, bondholders were slapped with a 75% haircut, taking home just 25 cents on the dollar.

Despite this, Moody’s rates PR’s GO and COFINA debt on equal footing, forecasting holders of both securities will recoup between 65 and 80 cents on the dollar, higher than the less than 35 cents expected for holders of debt from Puerto Rican agencies like the Government Development Bank.

With much left undecided, it’s pointless at this stage to anticipate how long this case may take, and what any final settlement might look like; nobody can say for sure whether the courts will find that they have the legal authority to issue a ruling. At some point, the Supreme Court may need to make a ruling.

Stock investors, for one, appear to be biding their time: While Detroit’s decision to file for bankruptcy back in 2013 shook markets, the Puerto Rican newsflow has barely registered outside of muniland.

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