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Puerto Rico debt crisis looms

Lawrence Lewitinn
Lawrence Lewitinn

The heat is on in Puerto Rico.

That's because the U.S. commonwealth will have $957 million in debt payments due on January 1. The debt payment is for interest on general-obligation bonds.

This has investors worried about the commonwealth’s “Cofina” bonds, which are backed by sales taxes. The bonds were considered a safe investment when they were first issued a decade ago. As much as $17.5 billion are currently owed with Cofina bonds, according to data from Municipal Market Analytics.

But Cofina bonds are technically issued by a government-owned entity called Corporación del Fondo de Interés Apremiante (Puerto Rico Sales Tax Financing Corporation). Therefore, they aren’t general-obligation bonds of the government. That's an important difference because according to Puerto Rico’s constitution, the commonwealth is obliged to pay general-obligation bonds.

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Puerto Rico has about $70 billion in debt spread out across several government agencies. There have been some attempts to keep things under control. For example, After months of negotiations with creditors, Puerto Rico’s Electric Power Authority restructured $8.2 billion of its debt on December 21.

But the fear is that the cash-strapped commonwealth will take Cofina’s money to pay for its general-obligation bonds. Many funds are invested in Cofina bonds, but the market is growing reluctant to hold them, pushing yields higher. Bond yields move in the opposite direction of prices.

Data compiled by S&P Capital IQ show that some Cofina bonds maturing in August 2016 now have a “yield to worst” at more than 28% While others maturing in coming years show a “yield to worst” ranging between 10% and 13%.

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