Some Of The Funds Losing Billions In Puerto Rico's Historic Bankruptcy

Tyler Durden's picture

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.

* * *

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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bobdobolina's picture

Could this lead to contagion within other territories/states in the US? Probably not. But is it something to be concerned about? Absolutely. Which is why its more important than ever to keep close tabs on prices

stinkhammer's picture

Where's the money Lebowski?  Where's the fucking money shithead?

DownWithYogaPants's picture

New York bankers are involved.  I suspect the government will print.

Manthong's picture

Live by the HY, die by the HY.

Mtnrunnr's picture

They wanted to make the entire state a debt slave state but they went full retard too soon. Coming to a municipality near you.

cheka's picture

the bailout game in full swing.  mutual funds will sell the bonds to goldman and other nyc skype for a fraction of face value.  frbny will then buy the toxics from skype at full face value.  just like they did with mbs a few years ago.  skype holiday bonus pools get major boost

Offthebeach's picture

Who got access to the secret hub cap vault?  100 million, real steel, real chrome , pre 1985 to 1945 hubcaps.  DeSotos, Packards, Hudsons, Lincolns and of course,  Cadillacs

Marge N Call's picture

I think it's down there somwhere...

The_Juggernaut's picture

Tough shit for them.  THey gambled on a bailout and (so far) lost.  Ha fucking ha.

Arnold's picture

Puerto Rico is in Asia, Right/

Soul Glow's picture

When I was in the financial industry my colleagues loved selling Puerto Rican debt.  They would tell clients "It has the benefit of tax free earnings AND it's backed by the government."  I never sold a single Purto Rican bond because, well, just look at them now.

unplugged's picture

good GOOD !!

I hope this whole shitshow bond market/paper asset shitpile catches fire and burns to the ground

Callz d Ballz's picture

Yup, sick of this "too big to fail" BS. They rode the gravy train long enough, time to pay.

Rainman's picture

Pimpco dumped all of its PR primary GO debt several years ago ... so they got that one right.

SpanishGoop's picture

Any pension funds among them.

Now they can blaim it on PR.


SummerSausage's picture

Did Chelsea's husband manage to lose investors' money in Puerto Rico?  He had a 100% track record of picking losers.

Offthebeach's picture

Look at who he married.

Maybe he just rolls her face down, has her bite the pillow and calls her Stavros. 

Squid Viscous's picture

ever hear the one about the two baby animals meeting in the middle of the road?

baby skunk says to baby duck, you have feathers, webbed feet and a bill ... you must be a duck!

babby duck says: you're half white, half black, and you smell like shit... you must be puerto rican!

Give Me Some Truth's picture

See what happens when you don't have your own printing press or the world's reserve currency? 

Ben A Drill's picture

Get ready for more EBT cards.

mpcascio's picture

Anyone who invested in PR should be fired.They have to be morons thinking that this wasn't going to happen.

youngman's picture

so when do they issue new debt..gotta keep on spending money you dont have you know...

Arnold's picture

Latino Greeks.

Faux austerity.

Semi-employed White Guy's picture

And what kind of dumb fucks will buy that debt?

TheAntiProgressive's picture

Yeah well boo-fucking hoo.  No bailouts for these idiots.

PreferredSpecialist's picture

If you were not adversly hit by this will happen. It is the black swan contagion. Better to be back in consumer durables and in securities where there are assets one can actually take, upon default.

Dragon HAwk's picture

I was going to buy some Puerto Rican Debt,  guy said he was a little short from his last drug deal and could i lend him some cash,  but the interest rate wasn't high enough. So I backed out

venturen's picture

Bonuses all around...central banks will print the difference

venturen's picture

Do I get my pick of the latinas? Might be worth it then

DonGenaro's picture

people who invest in govts deserve to lose every FN penny

StychoKiller's picture

Yer "Sombrero" looks like an Alien Flying Saucer, Nagual! :>D