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<h3>James A. Klotz</h3>

James A. Klotz

Everyone knows that fiscal conditions and media mania have put Puerto Rico muni bonds under extreme selling pressure lately.

As is usually the case, institutions and individuals are following the herd and indiscriminately selling any bonds that have Puerto Rico in their title.

What’s overlooked, however, is the fact that many of these issues are insured, and insurance companies are capable of stepping up if necessary. The result is that unusual opportunities are available for investors right now.

Value in the market

Today, for example, investors can buy Puerto Rico electric authority bonds, insured by National Public Finance Guarantee Corp., due in 10 1/2 years, yielding 6.50% to maturity. For investors in the top federal income-tax bracket, that’s a taxable equivalent yield of more than 10.75% – without even factoring in any state or local taxes. Of course, these Puerto Rico bonds are tax free in every state.

The media-fed frenzy has also created concern about the insurers themselves: Could they handle an apocalyptic scenario involving both Puerto Rico and Detroit?

In a recently released report, S&P addressed those concerns. The rating agency said its latest capital-adequacy analysis of National and Assured Guarantee Ltd. “shows these companies’ capital as very strong with sufficient cushion to absorb higher theoretical losses due to rating migration or actual losses….”

This view includes the extremely conservative assumption that the bond insurers will write limited new business. Additionally, S&P’s capital adequacy analysis projects a four-year period of stress similar to the Great Depression.

The failure to distinguish between insured and uninsured municipals is a tremendous disservice to investors unless they are paying attention.

Puerto Rico’s fiscal headwinds shouldn’t be minimized, but it is imperative for investors to know the specifics of each issue and recognize significant opportunities when they are available.

James A. Klotz

President

James A. Klotz is the President of FMSbonds, Inc.
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Oct 24, 2013

Please note that all investing entails risk. Fixed income securities are subject to risks that will affect their value prior to maturity. Some of these risks can be related to changes in market conditions, issuer creditworthiness, and interest rates. This commentary is not a recommendation to buy or sell a specific security. All references to tax-free income refer to U.S. federal income tax. Income earned by certain investors may be subject to the Alternative Minimum Tax (AMT), and or taxation by state and local authorities. Please consult with your tax professional prior to investing. For more information on these topics please click on the “Bond Basics” link below or search by keyword at the top of this page.