NEW YORK (Reuters) - Puerto Rico’s benchmark general obligation debt price fell to a record low on Tuesday in light trading as the prospect of a drawn-out restructuring of the island’s $70 billion debt load spurred selling.
The financially strapped U.S. territory filed on May 3 for the largest U.S. municipal bankruptcy in the history of the $3.8 trillion market.
The unprecedented filing was made under Title III, a provision of the 2016 federal rescue law known as PROMESA, which serves as an in-court debt restructuring process akin to U.S. bankruptcy.
On Tuesday, a mixture of small odd-lot trades, combined with a few larger block trades, left the price on the defaulted benchmark 2035 GO bonds below a bid price of 60, its lowest price since the $3.5 billion issue was sold in March 2014, according to Thomson Reuters data. 74514LE86=MSRB
The bid price on the bonds, which were sold with an 8 percent coupon, fell as low as 58.45 points before settling around 59.41 late on Tuesday. The larger block trades, which mixed in between the odd-lot trades, briefly lifted bid prices into the 61.75/62 range before settling lower.
“The longer (Puerto Rico) draws out, the lower prices could end up going down because of the extending timeline,” said Shaun Burgess, portfolio manager and lead trader for Puerto Rico strategy at Sarasota, Florida-based Cumberland Advisors.
“This is not going to be a fast process and market participants are coming to that realization and adjusting positions to newer estimated recovery time lines,” he said.
Puerto Rico’s bankruptcy dwarfs the prior record of $18 billion in 2013 that was held by Detroit. It took roughly 17 months to resolve Detroit’s case.
On Friday, U.S. Chief Justice John Roberts appointed a U.S. District Judge Laura Taylor Swain of the Southern District of New York to oversee the case.
It remains unclear how much of the case will be handled in New York and how much will occur in San Juan. The judge’s chambers declined to comment.
The federally appointed financial oversight and management board certified a 10-year fiscal turnaround plan that covers a quarter of the debt service required.
“And while the board is responsible for filing a restructuring plan, it will likely allow the government to craft the initial proposal. This puts creditors at a disadvantage because they may not propose alternative plans,” said Sean McCarthy, head of municipal credit at PIMCO.
Reporting By Daniel Bases; Editing by Cynthia Osterman
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