Puerto Rico hurtles toward default

A severe liquidity crisis that threatens to shut down Puerto Rico’s government is making life difficult for U.S. municipal bond investors.

The island territory has been labeled “America’s Greece.” Its $73 billion in bonds trading in the U.S. municipal-bond market carry junk ratings and are trading at record-high yields.

In a letter last week, the island‘s Government Development Bank said the government would likely shut down in three months, unless lawmakers agree on a financing deal that would see the island double its sales tax in an effort to balance its budget and allow it to sell $2.9 billion in new bonds.

Last Friday, Standard & Poor’s downgraded the Puerto Rico’s credit rating to CCC-plus, pushing it even further into junk territory, while a Bank of America report dated April 17 warned of the danger of “widespread restructuring for the commonwealth.”

This isn't a new phenomenon. Puerto Rico has been stacking up debt to close its budget gaps and fund its operations for years, while growth has remained anemic. Its population is declining and its tax base is shrinking, said Antonio Fernós Sagebien, principal at REOF Capital, a Puerto Rico-based distressed-debt advisory firm.

Government could run out of cash in 3 months

Puerto Rico hurtles toward default