Puerto Rico’s bankruptcy

The board overseeing Puerto Rico (PZT) (HYMB) filed for bankruptcy protection in a much-anticipated move in 2017. The bankruptcy filing is likely to result in a fierce legal battle among Puerto Rico’s 3.4 million citizens, its creditors, and its workforce.

In 2016, the oversight board was appointed to lead the crisis that struck the unincorporated US territory in order to bring back its fiscal sustainability. The bankruptcy suit was filed due to the territory’s inability to service its $72 billion in debt and $49 billion in pension liabilities as of July 2016. Let’s take a look at the increasing number of bankruptcies in Puerto Rico.

Puerto Rico’s Increasing Defaults Lead to Bankruptcy in 2017

Much awaited bankruptcy filed in 2017

On May 3, 2017, Puerto Rico’s financial oversight board filed for a court-sanctioned restructuring process known as Title III. This bankruptcy filing is an unprecedented action by Puerto Rico, which isn’t entitled to Chapter 9 bankruptcy protection like other US (SPY) (QQQ) jurisdictions.

However, under a law called the Puerto Rico Oversight, Management, and Economic Stability Act, US Congress gave Puerto Rico the ability to file for bankruptcy in 2016.

Increasing number of bankruptcies filed

Bankruptcies filed by the island’s public agencies are growing, as we can see in the chart above. The number of bankruptcies in Puerto Rico rose to 795 companies in February, compared to 626 companies in January 2017.

Economic impact

The bankruptcy court proceedings are expected to have a large scale impact on Puerto Rico’s economy:

  • cuts in pension benefits
  • public health and infrastructure projects expected to screech to a halt
  • intensified drain of monetary and intellectual capital

However, the restructuring of Puerto Rico’s debt due to its bankruptcy filing is expected to mark a positive step for bondholders overall. The court proceeding is expected to be a lengthy but orderly legal process, which should be an overall help to creditors in an uncertain and chaotic situation.

Impact on investments

Some ETFs with exposures to junk bonds in Puerto Rico include the SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB) and the VanEck Vectors High-Yield Municipal ETF (HYD). HYMB and HYD have exposures of ~9.4% and 2.2%, respectively, to Puerto Rico’s debt as of May 2016. In 1Q17, HYMB and HYD rose ~2% and 3%, respectively.

Let’s look at the parallels to Puerto Rico’s bankruptcy filing to better understand the situation in our next article.

Latest articles

25 Jun

Gold Breaches $1,400: What’s the Next Stop?

WRITTEN BY Anuradha Garg

Gold is now trading close to a six-year high following the Fed’s dovish pivot at its June policy meeting. After being range-bound for the last five years, gold has finally broken out and its outlook is bullish.

Shares of the J.M. Smucker Company (SJM) are up 29.8% year-to-date as of June 24 and have outperformed the broader markets. The company's acquisition of Ainsworth Pet Nutrition and its focus on high-growth categories via divestitures have supported its stock so far this year.

On June 25, General Motors (GM), America’s largest auto company, announced its plan to invest $20 million into its Arlington Assembly plant in Texas, according to Reuters. With the new investment, the company aims to upgrade its equipment before launching its full-size SUVs.

Shares of high-growth technology company ServiceNow (NOW) have gained close to 16.0% since April 2019. It's gained over 60.0% since the start of 2019. It also had an encouraging run in 2018, when it gained 32.0% in market value.

25 Jun

Ford to Announce Q2 US Sales on July 3: What to Expect

WRITTEN BY Jitendra Parashar

Earlier today, Ford (F) said that it would announce its second-quarter US sales data on July 3. In the first quarter, the company reported a 1.6% YoY decline in its US sales to 590,249 vehicle units. During the first quarter, Ford’s truck sales rose by 4.1%, and its SUV sales went up by 5.0% on a YoY basis.

On June 25, Credit Suisse initiated coverage on Chipotle Mexican Grill with an “outperform” rating and a target price of $870—a return potential of 20.1% from its stock price of $724.13 on June 24.

172.31.59.107