Amid the fog of doom that has enveloped Puerto Rico municipal bonds, a conspicuous, long-time investor in the island’s debt sees progress and a brighter future.
OppenheimerFunds, which has a big stake in the island’s munis, says that while fiscal problems persist in Puerto Rico, its leaders are making headway.
“Our investment team has researched Puerto Rico credits and invested in the island’s muni bonds for decades,” according to Dan Loughran, a senior portfolio manager and senior vice president at OppenheimerFunds, Inc. “The fiscal conditions on the island are better than we have seen in the past six years.”
A history of paying its lenders
Puerto Rico has been “willing and able to honor its debt consistently,” Loughran said, regardless of which party was in power, and officials have never even hinted at a default.
Although the island was hit hard by a long and rough recession, officials have taken measures to improve the fiscal position of all types of borrowers.
Puerto Rico has significantly decreased its budget deficit and increased tax revenue. It has strengthened its tax collection processes, which benefits holders of general-obligation and government appropriation debt, Loughran said.
He noted an increase in tax collections, which aids sales-tax-backed bonds, along with pension reforms, and an increase in Puerto Rico Aqueduct and Sewer Authority rates, bolstering revenue by almost $300 million annually, after years of flat rates.
“Investors haven’t been well-served by all the one-sided, negative and rehashed discussions that we have heard of late,” Loughran said, and some important facts have been virtually ignored.
Bondholders of general-obligation and guaranteed debt are first in line to be paid, Loughran pointed out, even before pensioners and government employees and officials – a position guaranteed in Puerto Rico’s constitution.
Further, he noted that Puerto Rico, a U.S. territory, and its cities, constitutionally don’t have the option of filing Chapter 9 bankruptcy.
Volatility, but payments expected to continue
As we have pointed out (“Signs of Progress in Puerto Rico Credit Outlook“), investors recently have been demonstrating increased confidence in Puerto Rico debt as conditions seem to improve. And although we anticipate Puerto Rico bond prices will remain volatile over the near future, holders of individual bonds should continue to receive their interest and principal payments in a timely manner.