Bloomberg News

Puerto Rico Distress Spells Wall Street Opportunity: Muni Credit

November 12, 2013

Puerto Rico debt is having its worst year since 1999 as a shrinking economy strains the island’s finances. For Wall Street banks and law firms, that’s a signal to tout the bonds to investors in distressed debt who don’t typically buy municipal securities.

In the last month, bankers at Citigroup Inc. (C:US) and Morgan Stanley (MS:US) made private presentations to investors in New York, according to people who attended the meetings. Lazard Capital Markets LLC said it hosted a similar event.

Bankers and lawyers are trying to boost trading and advisory fees for securities that are increasingly appealing to hedge funds and buyers of speculative-grade corporate and sovereign debt. They’ve been lured after yields on some Puerto Rico obligations, rated one step above junk, soared above 15 percent on a taxable basis, data compiled by Bloomberg show.

“All these broker-dealers are trying to raise interest in trading this paper,” said David Tawil, co-founder of Maglan Capital LP, a New York-based distressed-debt hedge fund that’s been buying the U.S. territory’s obligations. Tawil said he attended a presentation, though he declined to specify which one.

“The first thing that they’ve got to do is help on the education side, because a lot of distressed investors are not municipal-bond experts and they need to get comfortable,” he said. “They’re helping people get up to speed.”

Ripple Effect

The heightened demand from a new category of buyers is helping stabilize the $70 billion market for Puerto Rico debt as the commonwealth seeks to borrow to plug deficits and roll over bank loans. The territory’s fiscal health has implications beyond the Caribbean: More than 75 percent of U.S. mutual funds focusing on munis hold Puerto Rico bonds, which are tax-exempt nationwide.

Puerto Rico securities halted a four-month slide in October, paring this year’s tumble to about 15.6 percent, still the worst performance since at least 1999, Standard & Poor’s data show. The losses, along with Governor Alejandro Garcia Padilla’s steps to revive the economy and end budget gaps, have drawn buyers of distressed munis.

U.S. Role

Mary Miller, the U.S. Treasury’s undersecretary for domestic affairs, said at the Bloomberg Link State & Municipal Finance conference in New York last week that the U.S. isn’t planning “deep federal assistance” for Puerto Rico.

Yields on Puerto Rico munis have still dropped from record highs. Tax-exempt general obligations maturing in July 2041 traded Nov. 8 with an average yield of 7.86 percent, down from about 9.3 percent on Sept. 11, the highest since their original sale in March 2012, data compiled by Bloomberg show. For top earners, that is equivalent to 15.4 percent on a taxable basis.

Puerto Rico vowed seven years ago to fix its finances after posting a $740 million budget deficit. Yet the commonwealth and its agencies doubled borrowing since 2004, aided by Wall Street banks selling Puerto Rican bonds to money managers and individuals.

Scott Helfman, a spokesman for New York-based Citigroup, and Lauren Bellmare, a spokeswoman for Morgan Stanley in New York, declined to comment on the conferences.

Lazard Capital

Lazard Capital held a meeting Oct. 10 at its New York office with about 75 participants, said Peter Santry, head of fixed-income trading. As more hedge funds buy and sell commonwealth securities, the firm wants to capture that trading revenue, Santry said.

“You want to get business out of it,” Santry said.

Former Governor Luis Fortuno, who lost a re-election bid in November 2012 and is now a partner at Washington-based Steptoe & Johnson LLP, spoke at the Lazard Capital meeting on the legal structures of Puerto Rico debt and the commonwealth’s economy, Santry said. Fortuno declined to comment in an e-mail, saying he wouldn’t discuss current or potential clients.

Citigroup hosted an Oct. 24 conference that attracted more than 200 attendees, eight times more than the company was expecting, according to two participants, who asked not to be identified because the meeting was private. Bank representatives said in the presentation that the company originally booked a conference room and had to find a bigger space, the attendees said.

Island Underwriter

Peter Bartlett, co-head of Citigroup’s municipal trading and sales department, helped run the meeting, the people said. The company and its Salomon Smith Barney unit managed $27 billion of Puerto Rico debt sales since 2000, the most among underwriting banks, data compiled by Bloomberg show.

Bartlett, who is based in Los Angeles, didn’t respond to e-mails sent yesterday, when U.S. bond markets were shut for Veterans’ Day.

The audience included representatives from Och-Ziff Capital Management Group (OZM:US) LLC, Highbridge Capital Management LLC and P. Schoenfeld Asset Management LP, one of the attendees said.

Morgan Stanley, which has served as underwriter of the biggest percentage of the island’s debt this year, outlined Puerto Rico bonds during its Oct. 22 Global Distressed Debt Conference at the Marriott Marquis hotel in Times Square, according to three people at the meeting who asked for anonymity because the event was private. A participant who also asked for anonymity provided a copy of presentation materials by analysts Ryan Brady and John Ruiz.

Cadwalader Spotlight

Cadwalader, Wickersham & Taft LLP, a New York-based law firm that provides advice on distressed municipal debt, had a conference on Nov. 1 to discuss Puerto Rico, said a person who attended. A Cadwalader e-mail about the event provided by a recipient described it as: “Distressed Municipal Finance Series: Spotlight on Puerto Rico.”

Adam Segall, a spokesman for Cadwalader, declined to comment.

Puerto Rico Treasury Secretary Melba Acosta and Government Development Bank Chairman David Chafey also declined to comment.

Jonathan Gasthalter, a spokesman for Och-Ziff at Sard Verbinnen & Co.; Kirsti McCabe, a spokeswoman for Highbridge at RLM Finsbury; and Catherine Jones, a spokeswoman for Schoenfeld at ASC Advisors LLC, all declined to comment.

Commonwealth’s Efforts

Puerto Rico officials have made their own efforts to brief investors.

Tawil and Greenwich, Connecticut-based MeehanCombs LP, which manages $130 million, were among more than 2,000 participants in an Oct. 15 webcast in which Puerto Rico officials, including Garcia Padilla and Chafey, spoke on the island’s finances in a bid to calm the market for its debt.

Other participants included New York-based Arrowgrass Capital Partners (US) LP, whose parent company manages $3.5 billion of alternative investments; and MatlinPatterson Global Advisers LLC, a New York alternative-asset manager.

The Puerto Rico officials said on the webcast that they had sufficient funds to forgo selling debt before June 30 if interest rates are too high.

Detroit’s record bankruptcy filing in July and weeks of outflows from municipal mutual funds pushed up interest rates on the commonwealth’s debt and led it to turn to banks for private loans.

Garcia Padilla, 42, who took office in January, has pledged to create more than 90,000 jobs by 2016 and end recurring budget deficits. He enacted laws to boost the retirement age and require public workers to contribute more to pensions to help sustain a retirement system that has a weaker funding ratio than that of any U.S. state.

Budget Beater

The governor, a member of the Popular Democratic Party, boosted business taxes to help balance the fiscal 2014 budget. The island took in $120 million more revenue than budgeted for the first four months of the fiscal year that began July 1, according to preliminary data from its Treasury Department.

While revenue collections are above budget, the island’s economy is projected to shrink 0.8 percent in fiscal 2014, according to Puerto Rico’s Planning Board, which calculates economic growth.

In the broader muni market, issuers from California to New York plan to sell about $5.4 billion of long-term debt this week with benchmark yields close to the lowest since June.

Top-rated 10-year munis yield 2.73 percent, compared with 2.75 percent on similar-maturity Treasuries.

The ratio of the interest rates, a gauge of relative value, is about 99 percent. It’s the first time it’s been below 100 percent since June and it compares with an average of 94 percent since 2001. A lower figure signals munis are becoming more expensive compared with federal securities.

To contact the reporters on this story: Mary Childs in New York at mchilds5@bloomberg.net; Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net


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Companies Mentioned

  • C
    (Citigroup Inc)
    • $48.91 USD
    • -1.09
    • -2.23%
  • MS
    (Morgan Stanley)
    • $32.34 USD
    • -1.00
    • -3.09%
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