August 9, 2018 / 7:00 PM / 3 months ago

Puerto Rico bond prices surge as restructuring deals struck

CHICAGO, Aug 9 (Reuters) - Puerto Rico bonds rallied on Thursday, a day after the latest debt restructuring deal struck between the bankrupt U.S. commonwealth and its bondholders as well as a federal court ruling that affirmed the budgetary powers of an oversight board.

Stock prices rallied for bond insurers with exposure to Puerto Rican after the island’s government reached what it called a “milestone” agreement to restructure sales tax revenue bonds.

The benchmark Puerto Rico general obligation bonds due in 2035 with an 8 percent coupon traded as high as 52 cents on the dollar, up from the 40-cent-range at the beginning of August.

Senior revenue bonds issued by the island’s Sales Tax Financing Corporation (COFINA) due in 2057, carrying a 5.25 percent coupon, traded at 85.05 cents on the dollar. The subordinate COFINA 2041 bond, also with a 5.25 percent coupon, traded at 53 cents on the dollar after weeks of trading in a low 40-cent range. The 2042 6 percent subordinate COFINA bond traded at 51 cents on the dollar.

“We saw a more formalized agreement to restructure COFINA, and the recoveries are fairly good considering the circumstances,” said Shaun Burgess, portfolio manager, at Cumberland Advisors in Sarasota, Florida.

“Seniors are getting about 93 percent recovery,” Burgess said, adding that “is not much of a haircut and in the deal they have given up some of the dedicated revenue to GO bondholders as part of the arrangement.”

Subordinate bondholders are getting 56 cents on the dollar, he said. “Overall a good development for the commonwealth.”

Puerto Rico has been battling the twin scourges of fiscal and natural disaster. With about $74 billion in bond debt and another $50 billion in pension debt, it filed the biggest bankruptcy in U.S. government history in May 2017.

Its bond prices were already trading in default last September, when Hurricane Maria trashed the island’s infrastructure and sent them tumbling even further.

Puerto Rico owes about $18 billion each in general obligation and COFINA debt, meaning the groups combined own roughly half the island’s overall debt obligations. Pension related obligations is roughly $45 billion.

Peter Franks, senior market analyst at Municipal Market Data, said investors were encouraged by Tuesday’s ruling by a U.S. judge overseeing Puerto Rico’s bankruptcy case who made it clear that a federal oversight board can enforce fiscal discipline.

However, Judge Laura Taylor Swain’s ruling also stated the board, created under the 2016 federal PROMESA Act, lacks authority to demand changes in Puerto Rico law.

“The oversight board has got the freedom to do what it needs to do,” Franks said.

The deal announced on Wednesday by Puerto Rico’s government and its federal oversight board with COFINA bondholders and insurers would reduce the bankrupt corporation’s debt by more than 32 percent, resulting in about $17.5 billion in debt service savings.

That followed a tentative agreement in late July between the Puerto Rico Electric Power Authority (PREPA) and some of its bondholders. The government on Thursday launched creditor voting on a restructuring plan for Puerto Rico’s insolvent Government Development Bank, which has substantially ended its operations.

Analysts at BTIG reiterated a buy rating on Thursday with a $26 price target on Ambac Financial Group, Inc. following the insurers’ quarterly earnings call.

The firm cited the debt agreement as “a significant positive for AMBC which had $804.72 million of gross insured exposure to the COFINA senior bonds which represented almost 41 percent of its net insured exposure to Puerto Rico’s debt of as of June 30.” The stock traded up 5.1 percent at $21.99. MBIA Inc climbed 8.0 percent to 11.32 while Assured Guaranty gained 3.5 percent to $41.24.

Reporting By Karen Pierog in Chicago; Additional reporting and editing by Daniel Bases and David Gregorio

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