Puerto Rico opened a new “chapter” in distressed securities investing when it filed for court protection in early May. However, in this case it is not a chapter of the U.S. Bankruptcy Code such as Chapter 11 (which generally applies to companies) or Chapter 9 (which applies to municipalities). Because Puerto Rico is an unincorporated territory of the U.S., it was not eligible for traditional bankruptcy protection. Instead it filed under a new statute that was passed last year by Congress primarily to deal with the island’s problems. After years of economic decline, Puerto Rico is now in default on an estimated $74 billion of bond debt.
On top of that, the Commonwealth has approximately $49 billion of pension obligations and an ongoing need for funds to provide basic government services. Because of special tax law provisions that exempt the territory’s debt from not only federal taxes but also state taxes in every state, the bonds are widely held by investors across the country. Since the legal action is under a new law that has never been tested, there is tremendous uncertainty about how much creditors will recover and how long the process will take, but there may be opportunities for stock investors to profit from the island’s restructuring as well–perhaps with less downside risk than in many of the bonds.
George Putnam’s Turnaround Letter has identified four public companies based in Puerto Rico that could benefit from stabilization in the island’s finances as well as three major insurance companies with exposure to Puerto Rican debt. Learn more about the potential profit these seven companies could offer in The Turnaround Letter’s current issue.
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