Sunday, May 13, 2012

Investors Love Puerto Rico - Pension Bomb Ticks

Caveat emptor: Investors Love Puerto Rico While Pension Bomb Ticks: Muni Credit - Bloomberg: " . . . Puerto Rico has been battling budget deficits for 12 years, has a public pension that’s 9 percent funded and a debt load almost as big as its economic output. That hasn’t dimmed demand for its bonds from municipal mutual funds catering to investors living in Silver Spring, Maryland, and Virginia Beach, instead of San Juan and Vieques. . . .OppenheimerFunds Inc.’s Maryland, Virginia and North Carolina tax-exempt funds hold more than 30 percent of their assets in debt issued by Puerto Rico and its agencies, data compiled by Bloomberg show. . . . “It’s not the first thing that most people would expect when they buy a fund with their own state’s name on it,” Eric Jacobson, director of fixed income at research firm Morningstar Inc. in Chicago, said in an interview. “Investors are courting the income that these funds are throwing off. The question is, do they really understand where it’s coming from?” With local-government yields at the lowest since the 1960s, investors are looking past Puerto Rico’s chronic budget deficits and the threat of a downgrade from Moody’s Investors Service. . . . Moody’s in August lowered Puerto Rico to Baa1, three levels above speculative grade, and gave it a negative outlook because of its deteriorating pension fund and history of borrowing to bridge budget deficits. Standard & Poor’s rates Puerto Rico BBB, two steps above junk. Moody’s last month placed Puerto Rico’s $16 billion of sales-tax bonds on review for downgrade as well. A cut in the commonwealth’s rating could force selling, Boston-based Breckinridge Capital Advisors said in a March commentary. “Puerto Rico has systemic risk because it’s so widely and ubiquitously held because of the favorable tax treatment . . . .""

As they say, "Pigs get Fat, Hogs get Slaughtered."


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