Puerto Rico Bonds Rally After Rossello Becomes the Next Governor

  • General obligations trading at highest price in 17 months
  • Pro-statehood Rossello may pay interest to bondholders

Some Puerto Rico general obligations rallied to the highest price in nearly 17 months after the island elected New Progressive Party candidate Ricardo Rossello for governor, ushering in a change of power after the island defaulted on a growing share of its debt.

QuickTake Puerto Rico’s Slide

General obligations with a 5 percent coupon and maturing in 2041 traded Wednesday for an average of 65 cents on the dollar, the most since June 23, 2015, and up almost 2 cents from a day before, according to data compiled by Bloomberg.

Rossello has said that he favors paying bondholders interest if they agree to wait longer for principal payments. That’s a break with Governor Alejandro Garcia Padilla’s administration, which has defaulted on $1.8 billion of debt-service costs since August 2015, including on general obligations, which the island’s constitution says must be paid before other expenses.

“As a bondholder, you have something to cheer about,” said Matt Dalton, chief executive officer of Rye Brook, New York-based Belle Haven Investments, which oversees $5.5 billion of municipal bonds, including insured Puerto Rico debt. “At least he’s receptive to your needs and your wants.”

Rossello’s win empowers the party that’s pushing for U.S. statehood just as Puerto Rico struggles with a fiscal crisis so severe it prompted the federal government to step in. The new administration will have its power curtailed by a seven-member federal board with authority to approve the budget and any plan to restructure the island’s debt.

Garcia Padilla, a Popular Democratic Party member who favors retaining the island’s status as a U.S. commonwealth, chose not to run for re-election after one term. His administration started defaulting on bonds last year to avoid deep spending cuts needed to cover debt bills left by years of borrowing as the poverty-wracked island remained mired in recession. Without power to file for bankruptcy, Garcia Padilla pushed for Congress to come to his aid, resulting in the rescue measure enacted by President Barack Obama in June.

The rise in Puerto Rico bonds stands in contrast to the broader municipal-debt market, which slid after Donald Trump’s surprise victory in the presidential contest. Yields on an index of top-rated municipal debt maturing in 10 years jumped Wednesday to about 1.8 percent, up 0.09 percentage point from the day before, Bloomberg data show. Yields move in the opposite direction of prices.

Puerto Rico’s most actively-traded general obligation also gained in value Wednesday. General obligations with an 8 percent coupon and maturing in 2035 traded at an average price Wednesday of 71.5 cents on the dollar, the highest since March 22, Bloomberg data show.

Rossello faces considerable challenges. Puerto Rico’s population has declined in the past decade as island residents move to the U.S. mainland for work. The next administration must also find ways to turnaround an economy that’s failed to grow since 2007.

“Unless Rossello is going to cut a $20 billion check out of his own checking account and hand it to Puerto Rico, it’s a lot of wishing and hoping,” Dalton said.

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