Puerto Rico Defaulted 8% Bond Slumps To $24, Yield Rises To 32.878% (Population and Home Prices Continue To Decline)

Puerto Rico has had its share of tragedies. First, they are fiscally incompetent (regularly spending more than they take in).  Second, they were devastated by Hurricane Maria leaving much of the island in shambles.

Peurto Rico has defaulted on its 8% general obligation (GO) bond maturing in 2035.


The Commonwealth’s 8% GO bond has fallen to $24 and a yield of 32.878%. The good news? The bond’s modified duration has shortened to 3.287.


Recent trades show a pattern of deterioration in the price.


Hordes of people have been leaving the island and home prices have been declining since 2007,


How can things get worse for the people of Puerto Rico?



Venezuelan State Electric Company’s Trustee Declares Default (CDS Skyrockets To Over 16,000!)

The news the Venezuela is actually defaulting on its electric company bonds is hardly a surprise. Yet 1 year credit default swaps on Venezuela and their energy company PDVSA skyrocketed!

(Bloomberg) — Venezuela’s state electricity company was declared in default by Wilmington Trust, the trustee for the company’s bonds.

Electricidad de Caracas owed investors $27.6 million in interest payments on the notes due in April of next year. Its 30-day grace period expired on Thursday.

The $650 million of bonds had fallen to an all-time low of 23 cents on the dollar, showing that investors perceived them as the riskiest notes maturing during the next year in the world’s riskiest nation. While a default by the state oil company Petroleos de Venezuela, and possibly even the sovereign, could lead creditors to try to lay claim to the crude producer’s assets, Elecar, which PDVSA bought a decade ago, has nothing for overseas investors to seize.

“The Issuer’s failure to pay the overdue interest on the Notes on or before
November 9, 2017 constitutes an Event of Default under Section 5.1(ii) of the Indenture,” Wilmington Trust wrote in the letter to bondholders.

Some traders had long suspected that the bond could be a candidate for selective default because it contains no cross default clauses with PDVSA or sovereign notes. While bondholders may try to establish an “alter-ego” argument, that would most certainly be a lengthy legal battle.

The reaction in the CDS market?


Hey, at least Venezuelan oil prices are rising!


Chicago, The Puerto Rico Of The Plains, Goes The “Bowie Bond” Route (Selling Off Rights To Receive Sales-tax Revenue)

Chicago is truly “the Puerto Rico of The Plains.” Deep, deep in debt (declining population, rising expenditures).


In a frantic move to raise their bond rating, Chicago is doing what the late David Bowie did back in 1997: he securitized current and future royalties from recordings (Bowie Bonds had an interest rate of 7.9% and a life of 10 years. The Bowie bonds were purchased by Prudential Insurance for $55 million). So now Chicago is sellling off their sales-tax revenues.

(Bloomberg) -By Martin Z. Braun- Chicago’s public pension debt is $36 billion and growing, it’s facing $550 million in budget deficits over the next three years and this summer the state had to bail out a school system that was flirting with insolvency.

Yet next month, the nation’s third-largest city — whose bonds were downgraded to junk by Moody’s Investors Service two years ago — will start selling as much as $3 billion of debt that another rating company considers as safe as U.S. Treasuries.

That’s because Chicago is selling off its right to receive sales-tax revenue from Illinois to a separate public corporation, which will issue new bonds backed by those funds, a structure called securitization. Because bondholders will be insulated from the city’s finances and have a legal claim to the sales-tax money, Fitch Ratings deems the bonds AAA.

But Chicago’s sale comes as many cities face pressure from deeply underfunded pensions and opting for bankruptcy has lost some of its taint after a handful of governments did so after last decade’s recession, though Illinois municipalities aren’t allowed to take that step.
Chicago was extended the power to securitize its sales-tax payment by Illinois lawmakers this year. Paying off higher cost debt by issuing the new bonds will save Chicago almost $100 million in 2018.

Chicago’s new bondholders will have a first claim to more than 90 percent of the approximately $715 million of sales-tax revenue collected each year, according to a presentation to Chicago’s aldermen. The state, which collects sales taxes, will send the revenue directly to the bond trustee. Any excess revenue will go to the city. 

NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) has assigned an AAA long-term rating to Chicago’s Sales Tax Securitization Corporation’s Sales Tax Securitization Bonds Series 2017 A and Taxable Series 2017B.

Here is S&P’s summary.

Yes, there is a whole lot of municipal taxation in Chicago.


Chicago is now the David Bowie of cities, in addition to being The Puerto Rico of The Plains.


Debt Restructuring Scare Sends Venezuela’s 2 Year Yield To … 153%!

Venezuela’s President Nicolas Maduro sure looks snazzy in his colorful  attire (and medals), but he wins no medals for destroying their economy and market for their bonds.
(Bloomberg) — The specter of a Venezuelan debt restructuring is hitting some of the world’s largest money managers.
Their funds dropped Friday, when bonds sold off after President Nicolas Maduro announced plans to seek debt relief. Many had been heavily weighted in the oil-rich nation for years, meaning that while they enjoyed some of the best returns in emerging markets as the government kept up with its payments, they’re now vulnerable to any decline.
Ticker Name Tot Ret YTD Tot Ret 1Y Tot Ret 1D Geographic allocation
EMKIX US Ashmore EM Total Return Fund 10.62% 7.97% -1.79% Venezuela #6
PREMX US T. Rowe Price EM Bond Fund 8.53% 7.12% -1.17% Venezuela #6
GMCDX US GMO Emerging Country Debt Fund 11.68% 9.34% -1.08% Venezuela #4

* Based on data compiled by Bloomberg of funds with largest holdings of Venezuelan debt.

Jan Dehn, the head of research at Ashmore Group Plc, has no misgivings about his holdings. Although one of Ashmore’s funds posted its biggest daily decline since May 18, Dehn said that the selloff may well reverse. His willingness to stick with Brazil after that country’s bonds sold off six months ago amid corruption allegations against the president proved prescient as the notes rallied 7.3 percent since then, according to data compiled by Bloomberg.

“Volatility is inevitable, especially in a high-beta credit like Venezuela,” he said. “It creates trading opportunities. Right now, precisely during volatility episodes like these, the actions are being taken, which will ultimately differentiate good from bad managers.”


The Venezuelan yield curve (denominated in US Dollars) steepened today from 153% at the two year tenor to 45% at the 10 year tenor.


Here is Maduro gesturing what he is planning to do to bondholders.

Nicolas Maduro

Moody’s: Hartford Default Likely on Yearly Deficits Seen to 2036 (Connecticut Already Has 2nd Worst Public Pension Underfunding Requiring $22,745 Person To Fix)

As we watch the alleged Federal government shutdown by politicians who crave spending more and more of YOUR money (without cutting spending), we see the same in various states and cities like Chicago, Illinois. Now Hartford CT is in on the overspending act.

(Bloomberg) — Moody’s says the city of Hartford is likely to default on its debt as early as November without additional concessions from Connecticut.

Moody’s sees Hartford’s operating deficits of $60 million to $80 million through 2036
Hartford will look to bondholders to restructure roughly $604 million in general obligation and lease debt, Moody’s says.

Moody’s sees additional grant revenue or amount equal to PILOT payments cutting view of operating deficits by over half.

Yes, one of Hartford’s municipal bonds has dropped in price to $68.75 and a yield of 12.14%.


Moody’s says the city of Hartford is likely to default on its debt as early as November without additional concessions from Connecticut. From the second worst state in the nation in terms of public pensin underfunding (after my home state of New Jersey)? 

In New Jersey, the (public pension) funding gap represents nearly 42 percent of the Garden State’s Gross State Product – or more than $27,000 for every resident, according to S&P Global Ratings.

Other underfunded states include Connecticut ($22,700 per person), Hawaii ($15,700), Illinois ($15,900) and Alaska ($18,200).

2017.10.18 - Pension

Good luck with that Hartford. Citizens of Hartford will likely have to switch their beer consumption from Heineken to Pabst Blue Ribbon.


Muni Madness: Chicago Leads The Nation In Pension Underfunding, Honolulu Requires 76,121% In Worker Contributions Over 30 Years

According to Michael Cembalest at JPMorgan Chase, Chicago leads the nation in underfunded pensions at 23%. Chicago is followed by Phoenix, Dallas and Jersey City although Phoenix’s funding gap is 52% illustrating just how badly Chicago is underfunded.


On a county level, Cook IL (home of Sweet Home Chicago) leads the nation in pension underfunding, followed by Bergen NJ (home of the former Palisades Park amusement park).

So, what will it take to fix these underfunded pensions where politicians given away other people’s money? 1) Raises property and income taxes, 2) cut pension promises, 3) both. This is called REMEDIATION.

For Chicago, this requires a tax increase of 27% OR cuts in direct non-pension spending (crowding out) OR an increase in worker contributions of 428%. My personal favorite is Honolulu which may require an increase in worker contributions of 76,121%.


Raising property taxes will have a negative impact on attractiveness of these areas since many are already seeing a decline in population and economic activity.


Puerto Rico exemplies the muni madness BEFORE the hurricane strikes. Corruption, wasteful spending, ultra-generous pension plans.

Ah, the good old days.



Puerto Rican 5.75% Bonds Collapse To $33.45 (Darkness On The Edge Of The USA)

Puerto Rico is an example of Darkness on the Edge of Town (or the USA).  Electricity on the island is coming back, but much of it was knocked out by the hurricane.


Puerto Rico’s Commonwealth bonds have fallen in price … again. Consider the 5.75% coupon bond. The already defaulted bond has been trading at under $60, but has now fallen to $33.45 on the deadly hurricane strike.


Puerto Rico’s benchmark bond fell, allegedly, because Trump’s budget chief said no bailout for Puerto Rican debt (that is, BONDHOLDERS will not be bailed out). But the compressed chart used by Bloomberg masks the bond price decline that started months before the hurricane and any announcement by Mick Mulvaney, director of the White House budget office.


While the media and political hacks scream “Trump’s fault!” (Much like “Jerry’s fault!” on Parks and Recreation), Puerto Rico’s $34 bond has been a long time in the making. Corruption, overspending and a declining population led to Puerto Rico’s bond default in May of $70 billion of obligations, long before the hurricane struck.


Puerto Rico is truly “Darkness on the Edge of … the USA.”