Everyone knows that fiscal conditions and media mania have put Puerto Rico muni bonds under extreme selling pressure lately.
As is usually the case, institutions and individuals are following the herd and indiscriminately selling any bonds that have Puerto Rico in their title.
What’s overlooked, however, is the fact that many of these issues are insured, and insurance companies are capable of stepping up if necessary. The result is that unusual opportunities are available for investors right now.
Value in the market
Today, for example, investors can buy Puerto Rico electric authority bonds, insured by National Public Finance Guarantee Corp., due in 10 1/2 years, yielding 6.50% to maturity. For investors in the top federal income-tax bracket, that’s a taxable equivalent yield of more than 10.75% – without even factoring in any state or local taxes. Of course, these Puerto Rico bonds are tax free in every state.
The media-fed frenzy has also created concern about the insurers themselves: Could they handle an apocalyptic scenario involving both Puerto Rico and Detroit?
In a recently released report, S&P addressed those concerns. The rating agency said its latest capital-adequacy analysis of National and Assured Guarantee Ltd. “shows these companies’ capital as very strong with sufficient cushion to absorb higher theoretical losses due to rating migration or actual losses….”
This view includes the extremely conservative assumption that the bond insurers will write limited new business. Additionally, S&P’s capital adequacy analysis projects a four-year period of stress similar to the Great Depression.
The failure to distinguish between insured and uninsured municipals is a tremendous disservice to investors unless they are paying attention.
Puerto Rico’s fiscal headwinds shouldn’t be minimized, but it is imperative for investors to know the specifics of each issue and recognize significant opportunities when they are available.