Joe Deane, bond fund PIMCO‘s head of municipal bond portfolio management, Dave Hammer, municipal portfolio manager, and Sean McCarthy, the head of municipal credit research, sat down last week to discuss the evolving Puerto Rican debt Crisis.
The first thing the PIMCO execs did in the piece was to toot their own horn a bit. They noted the firm exited Puerto Rico all the way back in 2013 when they saw the handwriting on the wall.
“We have long viewed the challenge facing Puerto Rico (PR) as a debt sustainability issue. This led us to sell the last position in PR debt in our dedicated municipal portfolios in the first quarter of 2013 at a premium dollar price. And today, firm wide, we maintain zero exposure to Puerto Rico credit risk. PIMCO's rigorous top-down, bottom-up investment process confirmed our suspicions and informed our decision. Our credit research team's analysis of PR's capital structure has been extensive and exhaustive. When we weighed the economic, demographic, political and financial makeup of the island against the sheer amount of liabilities outstanding – $73 billion of bonded debt and around $30 billion of unfunded pension liabilities – it led us to conclude that the Commonwealth would face significant challenges making creditors whole on those obligations.”
Puerto Rico
PIMCO On why Puerto Rico debt is setting new lows today
Deane, Hammer and McCarthy highlight that until recently the market consensus was that Puerto Rico's general obligation debt was senior to other debt and liabilities because of a constitutionally protected claim on the Commonwealth's assets. This bubble has been burst over the last couple of months with the release of a report by a former deputy managing director at the IMF and statements from PR Governor Alejandro García Padilla.
The report notes the Commonwealth's large and growing cash needs. The PIMCO tean suggests this means the “need for a “comprehensive solution” entailing broader debt relief that would affect most parts of the PR capital structure, including GO bonds.”
