With the recent news surrounding the Detroit bankruptcy lingering in investors’ minds, the Commonwealth of Puerto Rico has recently been the focus of industry press. The pieces tend to focus on many of the credit negatives of the commonwealth that have been known in the credit community for a long time; specifically, its stalled economy, structural budgetary deficit, high debt and pension liabilities, below-average socio-demographics, and declining population. These realities are represented in the commonwealth’s current general obligation (GO) ratings of Baa3 (Moody’s – 10th highest of 21 ratings), BBB- (S&P – 10th highest of 22 ratings), and BBB- (Fitch – 10th highest of 20 ratings). In addition, all three major rating agencies hold negative credit outlooks for the future of the island’s creditworthiness.
While some of the articles I’ve seen do a great job focusing on the systemic risks posed by the wide ownership of Puerto Rico in mutual funds, the ultimate risk of investors in these mutual funds is the potential for a significant decline in the value of their investment because of the overweight exposure in the funds to the debt of Puerto Rico. Read more