How Socialism Destroyed Puerto Rico, And Why More Defaults Are Looming | Zero Hedge

How Socialism Destroyed Puerto Rico, And Why More Defaults Are Looming | Zero Hedge

With Puerto Rico missing a payment on a bond overnight "due to non-appropriation of funds" but denying that this constitutes anything close to a default, the territory may be about to retake the limelight as Greece is now "fixed." As MarketWatch reports,

The missed payment could have serious implications for holders of Puerto Rico bonds, “as the signal from breaking a seven-decade streak of bond payments may imply more defaults are looming,” Daniel Hanson, an analyst at Height Securities, said in a note.

Not all Puerto Rican bonds are created equal, being backed by different types of revenues, such as tax revenues, road tolls, electricity bills etc.

The first thing investors should do is “find out what revenue backs their bonds and whether their bonds are insured or not,” said Mary Talbutt, head of fixed income at Bryn Mawr Trust.

Approximately 30% of muni mutual funds have holdings in Puerto Rico, more than half of which are insured, according to a Charles Schwab Investment Management report. As for the revenue that backs the bonds, most exposure is with the sales-tax backed bonds, known as COFINA bonds from their Spanish-language acronym, and the general-obligation bonds, known as G.O. bonds, according to the report.

In that sense, investors that hold the PFC bonds are somewhat in a bind because “the language in PFC bonds makes payment dependent on appropriations from Puerto Rico’s legislature,” Hanson said.

This is the main difference between the PFC bonds and the G.O. bonds. The former require appropriation, while the latter are backed by the full faith and credit of the territory and their repayment is guaranteed by the constitution.

“The language... makes [the PFC bonds] a weaker credit relative to G.O. bonds. But a default is still a default,” said Andrew Gadlin, a research analyst at Odeon Capital Group.

This has investors worried about other types of bonds that face a repayment deadline, most notably those issued by the island’s Government Development Bank (GDB).

“The market is becoming more skeptical of the payments due August 1 on GDB debt, though the budget does set aside funds for paying these obligations,” Gadlin said.

And as Euro Pacific Capital's Peter Schiff explains, this is far from over

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