On September 20, 2017, Hurricane Maria laid waste to the Commonwealth of Puerto Rico. As we sit in Cumberland’s offices in Sarasota, Florida, we watch a humanitarian crisis unfold. Millions are without power, internet, cellular service, and clean drinking water. The process of rebuilding will be long and arduous. Damage estimates run into the tens of billions of dollars. Our hearts go out to the people of Puerto Rico, to all the families that have suffered and lost and may go on suffering for weeks … months … years.
Prices of uninsured debt have moved lower in response to the hurricane, driven by the expectation of a reduction in economic activity and the possibility for revenues to be diverted for recovery and rebuilding, as well as the President’s October 3, 2017, comments regarding the Commonwealth’s debt. The President stated during a Fox News interview, “You know they owe a lot of money to your friends on Wall Street. We’re gonna have to wipe that out. That’s gonna have to be -- you know, you can say goodbye to that. I don’t know if it’s Goldman Sachs, but whoever it is, you can wave good-bye to that.” We take these comments as an unclear off-the-cuff response with little merit. According to Bloomberg, “President Donald Trump’s budget chief said not to take the president’s suggestion that Puerto Rico’s debt would be ‘wiped out’ literally.” The Commonwealth’s most recent general-obligation debt issuance (arguably the most liquid of its uninsured debt), issued in 2014, briefly touched a new low of $32 before rebounding higher.
The yield on insured paper has also risen in response to the President’s comments. We remain confident that the insurers we utilize, Assured Guaranty and National Public Finance Guarantee, are capable of meeting all interest and principal payments necessary. As Moody’s Investor Service states in one of their most recent comments, “We believe that prospective Puerto Rico-related losses remain manageable within the context of the guarantor’s capital and core earnings power.” The hurricane may be positive for the insurers long-term, as federal dollars will be used to rebuild already deteriorating infrastructure. We view the volatility driven back up in yields of insured paper as an opportunity and it’s one we look to take advantage of for clients.
Shaun Burgess
Portfolio Manager & Fixed Income Analyst
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