“We think it’s a very high rate of return for Prepa,” Bruce Richards, head of the hedge-fund firm that manages about $12 billion, said in an interview on Bloomberg Television at the SkyBridge Alternatives Conference in Las Vegas. “It’s one of the best ideas that we have in our fund.”
Richards is the second money manager this week to tout the struggling U.S. territory’s bonds. DoubleLine Capital’s Jeffrey Gundlach this week compared Puerto Rico obligations to buying mortgage-backed securities in 2008 which he said turned out to be a “fantastic investment.” Fund manager Pacific Investment Management Co. took the opposite approach, warning in a blog posting that the island faces “daunting challenges.”
Puerto Rico has come to rely on hedge funds to buy its debt, most of which trades at distressed levels. The firms are increasing their positions as traditional purchasers of municipal debt such as mutual funds have stepped back amid growing risk: 54 percent of muni mutual funds hold Puerto Rico bonds this year, down from 77 percent in October 2013, according to Morningstar Inc.
Prepa Talks
One of the biggest debt issuers on the island, the cash-strapped Puerto Rico Electric Power Authority known as Prepa, has been in talks with creditors to negotiate a plan to restructure its $8.6 billion of obligations. Investors, insurance companies and banks that hold the authority’s debt agreed to a third extension, through June 4, of an agreement that keeps it out of default.Creditors offered a restructuring plan in April that would inject $2 billion into the junk-rated utility to modernize facilities and repair its finances. New York-based Marathon, which owns “a substantial position” in the debt, is negotiating along with other fund managers to create a “new-money solution” that would include debt, Richards said.
The lenders’ plan “doesn’t require a restructuring” and “would keep the principal in place” for the utility’s current debt, Richards said in an interview on Bloomberg Television’s “Market Makers,” hosted by Erik Schatzker and Stephanie Ruhle.
“We’ll certainly underwrite the debt and equity for this solution. We believe the equity dollars are lined up,” Richards said.
‘Draconian’ Cuts
Pimco’s Sean McCarthy said in a report on its website Wednesday that it “remains unenthusiastic” about investing in the island’s debt, because of elevated borrowing costs and the potential for “draconian” budget cuts. He said favorable near-term developments might result in long-term holders of the obligations selling their holdings.Richard Larkin, director of credit at Fairfield, Connecticut, investment firm HJ Sims & Co., warned in a report Wednesday that “mismanagement and political failure” in Puerto Rico would “likely result in bond defaults and major financial crisis management.”
Larkin said Prepa has chosen to pass on savings from falling energy prices to customers rather than use the cash to shore itself up.
Reduced Costs
The Prepa bondholders’ plan would reduce power-generation costs by switching the island to “a new gas and electric facility” so the utility doesn’t have to import expensive oil to generate power, Richards said. The fund managers are negotiating with officials of Puerto Rico and General Electric Co., he said.The plan provides for GE upgrading Prepa’s Aguirre facility, near the island’s southern coast, to burn natural gas.
The utility’s chief restructuring officer, Lisa Donahue, said April 30 that the forbearance agreement from lenders “will likely have to continue through the end of the summer” as negotiations go on.
A Prepa bond maturing in July 2040 traded for an average price of 52 cents on the dollar Wednesday to yield 10.86 percent, according to data compiled by Bloomberg. That price is up from 49.4 cents at the end of 2014. Interest on Prepa bonds is exempt from federal, state and local income taxes throughout the U.S.
Laura J Keller
Marathon Sees Prepa Debt Among ‘Best Ideas’ in Gundlach Echo
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