Details on Puerto Rico's Key Debt Offering Expected Next Week

By Government Spending FOXBusiness

Investors expect that Puerto Rico will  release details of its upcoming $2.8 billion debt offering sometime next week. 

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A leading municipal bond trader tells FOX Business that potential buyers of the debt are demanding protection. Puerto Rico could offer them liens against public assets or privileged status as an incentive, but that would subordinate holders of previously issued Puerto Rico debt.

Either action could trigger a sell-off by existing bond holders -- and a slew of lawsuits.

DT Investment Partners co-founder and CEO Jon Smith sold all of his Puerto Rican bonds more than a year ago and has no intention of buying any more. “If there is ever a sniff of something fishy or people not making payments, you sell it right away, cut your losses,” he said.

Smith expects the new offering to yield 10% -- and possibly higher -- to attract investors. Those who bought Puerto Rican debt in the past may be prohibited from purchasing this time since all three ratings agencies have rated Puerto Rico below investment grade, or junk.

That’s why Smith sees multiple danger signs not only for investors but for Puerto Rico itself.

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“The fact that Puerto Rico is negotiating with hedge funds to create the demand that they need is scary because it shows they are going as far down on the food chain as they can,” he said.

Puerto Rico has established a new entity -- COFIM -- to issue the bonds. A portion of the islands sales-tax revenue will be dedicated to service the debt. Unsurprisingly, that upsets current bond holders. Smith says the price of existing Puerto Rican debt is likely to fall when the new offering goes public. 

“If the yield they need to offer is so large they can’t support it as a government then to me it’s catastrophic for people who own Puerto Rican debt,” he said.

Stay tuned!

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