Investing in Puerto Rico: What Investors Should Know

Investing in Puerto Rico: What Investors Should Know

In recent quarters, investors have been on high alert about Puerto Rico’s ailing financial situation.

The concern was sparked by the US territory’s ongoing recession, which has been characterized by high unemployment, $70 billion1 of total debt and a consecutive streak of annual budget deficits.2 Compounding investors’ fears were Detroit’s recent bankruptcy filing and June’s massive sell-off in the municipal bond market, which may have caused some weakness in Puerto Rico’s debt. 

Certainly, investing in Puerto Rico can be risky. However, as active managers, we believe risks can be mitigated by thoroughly understanding each issue, and that even controversial regions may contain attractive relative value opportunities with income that we can pass on to our shareholders.

We cannot be certain what the situation in Puerto Rico will look like 10 years from now, but today, we believe the commonwealth does not face a near-term default, and that fund managers who shun the region are paying an opportunity cost.

On Aug. 26, 2013, an article on the cover of Barron’s highlighted Puerto Rico as the next Detroit. Though the two may share similarities like declining and weak economies, persistent budget deficits, and onerous debt, there are three significant differences worth noting.

  1. Timeline of their declines — Detroit’s finances have been on a downward path for 60 years; meanwhile the Puerto Rican economy will soon be entering its seventh year of recession.
  2. Steps taken by leadership — Detroit’s emergency manager, Kevyn Orr, presented a debt-restructuring plan that offered an unpalatable 10 cents on the dollar on some of the city’s unfinanced debt obligations. His plan was interpreted by creditors as an unwillingness to make the compromises needed to keep the municipality out of bankruptcy. In contrast, Puerto Rico has taken painful and politically unpopular steps to avoid restructuring and default. A new government elected in 2012, led by the populist Governor Alejandro García Padilla, is committed to putting Puerto Rico and its various bond-issuing authorities on a stronger financial footing.
  3. Market demand ­– Debt issued by Puerto Rico has a strong investor base given its “triple” tax exemption — federal, state, and local — which is rare in the municipal market. The debt issued by the commonwealth is not only in high demand by national municipal funds for the triple tax-exemption, but also by single-state municipal funds, who use the debt as a diversifier. By contrast, debt issued by Detroit does not have a distinct investor base, therefore demand for the debt is a fraction of that of the commonwealth.

1 Source: Commonwealth of Puerto Rico, Financial Information and Operating Data Report, May 17, 2013.

2 Source: Barron’s, “Puerto Rico in Trouble,” Aug. 26, 2013.

About risk

The risks of investing in securities of foreign issuers can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified funds.

Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer’s ability to make payments of principal and/ or interest.

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Stephanie Larosiliere

Client Portfolio Manager1

Stephanie Larosiliere is the client portfolio manager for the Invesco Municipal Bond team. Ms. Larosiliere works with the fund management team, acting as its representative to retail clients and other intermediaries.

Her responsibilities include working with sales staff and clients to provide insight on the municipal fixed income market and the investment strategies utilized by the team. She is also responsible for ongoing product development and marketing for the municipal bond products.

Ms. Larosiliere joined Invesco in 2011 as a senior product manager supporting the municipal and convertible businesses. Prior to joining Invesco, Ms. Larosiliere served as a vice president in the Goldman Sachs Asset Management fixed income product management team where she was responsible for portfolio analysis, product development, client retention and marketing. Prior to joining Goldman Sachs in 2008, she worked as an institutional product management associate for Brown Brothers Harriman. She began her career in the industry in 2003 as a risk management analyst with JPMorgan Chase where she was responsible for performing daily value at risk (VaR) analysis and monthly stress risk tests on the bank’s credit portfolio.

Ms. Larosiliere earned a BBA degree in finance and investments from Baruch College — The City University of New York (CUNY).

1 Not involved in managing assets of any fund.

 

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4 comments

  1. Sounds like a bias argument . Timeline …It does not take 60 years to go bankrupt. About the change in Government , is all about politics not really thinking about what is best , only what is best for them (political party).

  2. John E. Mudd

    Your commentary does not take into account the negative impact of the slew of taxes imposed on the PR economy. In the first month of these taxes being in force, instead of of collecting $100 million, only $3 million was collected. The possibility of default by 2015 is very rral

  3. Antonio Fernandez

    The problem with this new elected government is that they have without much thought or planning taken the easy way out of taxing decent tax payers in order to pay debt w/o a plan of restructuring the budget, reducing the labor force in the government, privatizing utility companies (monopolies) which are preventing the economy from growth.
    One of the challenges, which the government does not seem to recognize is the necessity of collecting taxes from tax evaders. I have heard that only 23% of the population pay taxes on this island.

  4. Lissy Rivera

    Since I live in Puerto Rico and my job concerns all what implies business I do have a very different opinion. Yes it’s political but last governor took the island into bankruptcy an also because his lack of action for the first time Puerto Rico had a recession that we haven’t seen since 1940. Yes politics do have a lot of impact in the economy; his personal wealth grow into millions an he and his wife flew away to US. The new goverment is trying to del with the “bankruptcy” and the people’s lack of believe in the goverment. Also yet we are struggling with the economy there are sectors that still the same or grow like automotive, goods, sales of electronic gadgets. As in the Us our economy has slow down in construction sector, but still I think we are going to recover. Puerto Rico is a tiny island and that makes a huge impact in land prices and still we do make housing projects for low income and middle class people. The high end projects condominiums houses from 1mm those are slow and yet little by little struggling they are moving them. I think we’ve learned our lesson if the US economy has a cold we would have a Pneumonia. It’s true our economic system is almost totally base in the US models. Since we don’t have ships our freight are higher that other places because we have to stick to what the US permit us to do.
    Puerto CIO has a lot of incentives for those who would like to invest in our island besides our strategic location our people are very well known for being loyal,hard workers, one of the best employee in the world. Before fining I would love to say visit PR and check what other places for invest gives you as much we do. Puerto Rico does it better.

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