Puerto Rico’s restructured bonds will be exempt, provide fresh high-yield liquidity

Puerto Rico’s restructured general obligation bonds will be tax-exempt, should be expected to enter the market as soon as March 15 and provide fresh liquidity for the high-yield market.

The Oversight Board relayed the exempt status of the new bonds to the U.S. District Court for Puerto Rico, which oversees the Puerto Rico bankruptcy, Tuesday.

Nixon Peabody determined the bond’s interest will be excluded from gross income for federal income tax purposes and will not be treated as a preference item in calculating the minimum tax imposed under the Internal Revenue Code of 1986.

The bond exchange would affect what started as $24.2 billion of GO, Public Building Authority, Puerto Rico Infrastructure and Finance Authority, Convention Center District Authority, and Employees Retirement System bonds. These would wind up as $7.4 billion of bonds plus entitlements to up to a maximum of $10 billion more of contingent vehicle instrument payments.

And on top of this there would be an immediate $7.78 billion cash payment to holders of some of the bonds.

Puerto Rico flag

On Tuesday a notice from Nixon Peabody on this topic was distributed to holders of current Commonwealth of Puerto Rico bonds awaiting restructuring.

The board hopes to enact the court approved Plan of Adjustment on March 15. Teachers associations and credit unions have sought court stays but Judge Laura Taylor Swain has yet to rule on the requests.

In Nuveen’s Weekly Fixed Income Commentary, Chief Investment Officer Anders Persson and Head of Municipals John Miller noted that high-yield municipal credit spreads have widened “for an asset class with broadening improvement in credit quality.”

A new-issue supply vacuum is forming, making market access and credit selection even more valuable, they said.

“The Puerto Rico GO exchange should provide a major liquidity injection and boost to secondary market trading heading into the last weeks of a very atypical first quarter,” the report said.


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