Is Puerto Rico the next Lehman Brothers? So asks one Chadds Ford money manager who sees parallels between Puerto Rico and the ill-fated brokerage firm Lehman, which went bankrupt at the height of the 2008 financial crisis.
"It sounds a bit scary," says Jonathan D. Smith, chief investment officer of DT Investment Partners. "There was a lot of positive buzz after Puerto Rico's last bond-issue deal was so successful - as there was when [billionaire investor] George Soros took a stake in Lehman. But now it's cooling off, and getting worse with the fiscal emergency bill they signed."
On June 25, the governor of Puerto Rico introduced legislation to establish a debt restructuring for public corporations in the commonwealth during an economic emergency, and it's expected to be signed by Monday.
Hedge-fund investors who bought Puerto Rico's $3.5 billion general obligation bonds in March received yields of about 8.5 percent. But even so they would be losing 5 percent now, Smith estimates. "We were extremely uncomfortable with that deal," and didn't buy any of the March issue, he says.
Those Puerto Rico bonds maturing in July 2035 traded at 92.5 cents on the dollar Friday, up from 86.4 cents on June 24, the day before the governor filed his emergency bill, Bloomberg data show.
"There is a stretch for yield going on," Smith says. "Investors are chasing riskier investments that tout a big yield but have more inherent risks. Brokers don't explain the risks involved, and only highlight the top line current yield number. Forgo the nominal extra yield and wait it out."
Puerto Rico is clearly on the minds of American policymakers. New York Federal Reserve president William Dudley last week addressed Puerto Rico fiscal and economic problems (Read his speech at http://goo.gl/A44lyg). Smith is avoiding Puerto Rico. He's sticking with Villanova, Jefferson Health System, and Children's Hospital bonds instead.