Buoyed by an agreement to extend the credit for Puerto Rico’s power authority, the commonwealth’s general obligation bonds are on the upswing.
GO bonds, maturing in 2035 with an 8% coupon, traded at 91.101 this Tuesday, up from 89.784 the day before, according to Reuters. Tuesday’s price was up 7.8% from an average low of 84.511 on July 6.
PREPA’s deal with banks
The deal reached last week between the power authority (PREPA), and several banks, delays payments totaling almost $700 million until March 31, 2015. Under the agreement, the power authority must appoint a chief restructuring officer by Sept. 8. Other milestones in the agreement call for a five-year business plan to be developed by Dec. 15 and a debt restructuring plan by March 2, 2015.
PREPA, which relies on costly oil to generate electricity, faces significant challenges and is regarded as the most fiscally vulnerable among Puerto Rico’s highway, water and electricity agencies.
Turmoil has plagued Puerto Rico bonds since June, when the commonwealth enacted legislation that would allow the debt of some of its public corporations to be restructured.
Though it roiled the markets, most analysts see the move as a way to help protect Puerto Rico’s general obligations bonds as well as other issues that are considered exempt from restructuring. While a number of mutual funds have retreated from the market, several hedge funds have stepped up and have become buyers.
Hedge funds take notice
Among those profiting from the recent rally are a group that Fitch estimates is comprised of more than 60 alternative fund managers, who together, now hold more than $16 billion of Puerto Rico debt.
Further, about 27 creditors known as the “Ad Hoc Group,” which has more than $300 billion in assets under management, hold more than $4.5 billion in Puerto Rico debt, mostly in GO, Government Development Bank, Puerto Rico Sales Tax Corp. (COFINA) and Public Buildings Authority (PBA) bonds.
The group could become a source of financing for Puerto Rico.
“The Ad Hoc Group stands ready to be a potential source of financing to assist the Commonwealth and the Governor as they continue their efforts to improve the island’s fiscal position,” the group’s steering committee said in a statement.
The group is led by Brigade Capital Management, Fir Tree Partners, Monarch Alternative Capital LP and Perry Capital LLC.