Distressed Munis, Buy, Sell or Hold?

Detroit and Puerto Rico which have been on the market’s radar screen for quite some time. In early March 2013, Detroit announced a yet-to-be-named state-appointed emergency manager for the City of Detroit. Few in the muni market are unaware of the challenges facing the city, but it is worth mentioning that municipal market participants may view this step constructively, as past history shows that direct governmental involvement has been positive for bondholders in prior cases of distressed cities over the past 50 years.

Next is Puerto Rico, as their Government Development Bank announced a series of measures designed to help reform and bolster their underfunded employee retirement system. Here is a list of defaulted Puerto Rico bonds. Although Moody’s downgraded Puerto Rico general obligation bonds in December 2012 and more recent market action has resulted in price decreases since mid-January. Puerto Rico remains on credit watch negative from Standard & Poor’s and Fitch. Puerto Rico will be coming to market in Q2 2013 with new issues that will re-set the bar for existing Puerto Rico bonds. For anyone owning Puerto Rico bonds, this new issue will be worth watching. The media is reporting that Puerto Rico is marketing itself as a legal tax haven to US residents since there is no Federal income tax on residents