Puerto Rican Bonds

A Compelling Opportunity In Puerto Rican Bonds

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives

Q3 hedge fund letters, conference, scoops etc

A settlement has been struck that will give certain Puerto Rican bondholders 33% upside to today’s trading – with much more potential upside than most observers appreciate.

This is a follow-up article to the blog posting we published on January 24th of this year where we encouraged readers to consider investing in subordinate (“junior”) Puerto Rico Sales Tax Revenue Bonds (also known as “COFINA”) when they were trading just under 15 cents per bond. The blog post can be found here.

Just over half a year later the same bonds are now trading around 45 cents on the dollar after, starting the year under 10 cents on the dollar and there remains substantial near-term upside to this trade.

These bonds were and are trading “flat,” which means they are not trading with accrued interest of approximately 1.5 years that is currently in trust at Bank of New York. My firm’s analysis suggests junio COFINA bonds have additional, mostly near-term, upside of another 33% to as much as 180%. Though these bonds should only be considered by speculative investors, our research suggests a disproportionate amount of remaining upside for the chance of downside deviation from today’s market prices.

Puerto Rican Bonds

Our research suggests further upside to COFINA JR Bonds with returns of 33% to about 180% possible within the next three months with a relatively low likelihood of downside deviation.

Since our blog posting (which was our first public sharing of our research) the junior COFINA bonds have had a historic rally that is almost unheard of in the municipal bond market: up over 300% from that date. The most recent upward price movement happened after a settlement agreement was reached between most of the vested parties in the Commonwealth of Puerto Rico bankruptcy proceedings. According to our calculations, if the settlement is consummated on or about January 1, 2019, the net recovery on that agreement will be about 60 cents of par for the junior holders, an additional 33% upside to recent trades. However, we believe there is relatively low chances for downside deviation and much more upside than the market is currently pricing in. In fact, we believe there are several pathways that could lead to over 100% of par recovery (full par plus accrued interest already in escrow) for both junior and senior COFINA investors, which is closer to 200% returns based on recent trades. Because the junior COFINA bonds are currently trading for around 45 cents in odd lot quantities versus around 82 cents for senior issues, we favor the junior COFINA bonds at this time.

Graph of a junior COFINA bond price chart YTD

Puerto Rican Bonds

Puerto Rican Bonds

Source: emma.msrb.org “1” represents the approximate time and level of trading of our last Seeking Alpha posting (1/24/18 at around 14.2 cents).

We believe the 33% upside we calculate to be inherent in the existing agreement to be a relative baseline that is unlikely to be negotiated lower – and this (and potentially greater) upside shall be realized mostly between now and year end 2018.

Read the full article here by Mark Elliott, Advisor Perspectives


Saved Articles

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

Congrats! Are you a smart person?

We have an exclusive targeted & limited time offer for being a sophisticated and loyal reader.

ValueWalkPremium is a website and newsletter on the latest industry news much of which is not in the public domain and obtained via our sources.

We also have 10 years of resources on how to use this information to better your investment process.

Sign up for  today and get our exclusive content for 40% off. This is our second biggest discount ever!!

Use coupon code VIP20 or click on the button below

Limited time offer only ENDS 4/30/2020 or after the next 40 subscribers take advantage whichever comes first – please do not share this discount with others