Fitch Ratings expects some high-yield U.S. municipal closed-end funds (CEFs) to consider participating in the recently announced $750-million offering from the Puerto Rico Aqueduct and Sewer Authority.
Puerto Rico bears very high speculative risks, and until a clear pathway for an orderly restructuring of debt occurs, purchasers today face the risk of being part of a future restructuring.
The PRASA offering will be the first test of the market's appetite for Puerto Rico-domiciled issues since Gov. Alejandro Garcia Padilla's June statement that the commonwealth's debts were not payable. On Jan. 1, 2016, the commonwealth faces $370 million due in debt service payments on its general obligations bonds.
If the PRASA offering is successful, a return of municipal CEF managers as investors in Puerto Rico would be a benefit to the commonwealth as they could be an important source of liquidity and signal that market participants are more willing to estimate recoveries post default of Puerto Rican issuers. However, even a successful offering does not mean there are not significant risks ahead.
Fitch notes that under proposed changes to Fitch's rating criteria for preferred stock of municipal CEFs, exposure to non-investment-grade, state-level issuers would be capped at no more than 10 percent of the portfolio for calculating asset coverage. This lower exposure is proposed given the amount of volatility seen in the price of Puerto Rico bonds since 2013.
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