Gyroscopic Investing

https://www.nytimes.com/2019/07/14/busi ... e=Homepage

The Executive Summary:
* Pensioners are being treated as having first claim on the territory's resources, ahead of bond holders. This appears to contradict PR's constitution and laws.
* Under the current proposals, 61 percent of the retirees would keep receiving their full pensions and none will receive less than 91.5%.
* Bond holders will receive no more than 64 cents on the dollar. Many will receive less.
* The board intends to declare bonds issued in 2012 and 2014 unconstitutional and effectively null and void.
* Bonds issued before 2012 will be honored at 64 cents on the dollar.
* Those issued in 2012 would be offered only 45 cents on the dollar. And those issued in 2014 only 35 cents on the dollar in a take it or leave it and get nothing settlement offer.
* Lawsuits are expected to challenge the basis for the settlement. But many bondholders are expected to take what they can given that the recent Detroit bankruptcy essentially followed the same pattern of putting pensions ahead of bondholders.

Thoughts: If this goes through and survives the court challenges it's going to send a signal that municipal bonds are nowhere near as safe as hitherto believed. It will almost certainly encourage states in serious fiscal trouble like Illinois to try the same thing. And my guess is the bond market is going to have to recalibrate it's risk reward ratio for municipal bonds. All of which means that municipal bonds at all but the highest credit ratings, could take a hit. And that hit will also be felt by those seeking to borrow money who are suddenly going to find that their legal guarantees are being viewed with suspicion by potential lenders demanding higher yields for their paper.

Edit: Between Detroit and PR the bond market might start singing that line from one of my fav 1980's songs... https://youtu.be/09GwdMw0Kfk

One of my favourite athletes I used to watch while growing up, Felix Trinidad, is apparently broke because of the Puerto Rican bond fiasco.

The man made millions upon millions in his career as a great knockout artist. Now he's got barely anything to show for it.

https://www.ringtv.com/332413-tito-trin ... 3-million/

That's very sad. A lot of people are going to get hurt by this. And that would be true no matter who got favored in the legal settlement. But I think the real loser here is likely to be the rule of law, which has always been crystal clear that bondholders are first in line in pretty much any bankruptcy.

IDK...isn't a government's first responsibility to it's people?

Personally, I have little sympathy for investment organizations who don't actually perform due diligence on large investments.

Governments make the rules which means they can be changed at any time.

Finance and government 101.

The interest rates on Puerto Rico's bonds had been high for a reason. Chasing yields gets you what you deserve.

I tested out the waters of Lending Club with the same chasing-yield idea in mind. I'm glad it was only with a token amount of $$, just enough to get the recommended diversification. Yield looks good on Lending Club's website, but by my calculations the net return was only barely enough to pay the taxes. It ended up as a break-even. I would never have put large amounts into it, any more than I would have bought large amounts of Puerto Rico's bonds which have been known to be at high risk for a long time now.

Kbg wrote: ↑Wed Jul 17, 2019 8:43 am IDK...isn't a government's first responsibility to it's people?

Personally, I have little sympathy for investment organizations who don't actually perform due diligence on large investments.

Governments make the rules which means they can be changed at any time.

Finance and government 101.

sophie wrote: ↑Wed Jul 17, 2019 8:55 am The interest rates on Puerto Rico's bonds had been high for a reason. Chasing yields gets you what you deserve.

Yup. And add to that people who give their money to asset managers without knowing what those managers are doing with it.

Were insured PR bonds ever under offer and if so how would those holders fair in this type of situation?

Good summary, Ad Orientem, thank you.

Kriegsspiel wrote: ↑Wed Jul 17, 2019 11:10 am

sophie wrote: ↑Wed Jul 17, 2019 8:55 am The interest rates on Puerto Rico's bonds had been high for a reason. Chasing yields gets you what you deserve.

Yup. And add to that people who give their money to asset managers without knowing what those managers are doing with it.

My father’s bond guy bought some PR bonds when he stopped paying attention. He used to pay attention, but experienced three stressful things in the space of a year — not from me; I’m perfect — and ignored the purchase of structured products even though he was receiving statements. If I recall, it was the purchase of Puerto Rican bonds that woke him up.