Dear Investors,
On Monday, a positive step was made towards resolving the Puerto Rico debt restructuring, as the judge approved the Plan of Adjustment for Puerto Rico’s COFINA sales tax bonds. COFINA senior and junior bondholders will recover 93 cents and 56.4 cents on the dollar, respectively. Puerto Rico benefits by saving $17 billion in debt service over a 40-year period.
To put these recoveries in perspective, in December of 2017, we were buying the junior COFINA bonds at 9-12 cents on the dollar. Not all accounts own the bonds, as they were only appropriate for cash accounts that didn’t already have a full allocation to the bond insurance companies we’ve been investing in for years. Nearly all of our accounts have benefitted significantly from the recovery in the island, as we have major investments in AGO and AMBC that have appreciated, in addition to various classes of PR bonds.
The COFINA senior bonds represent 78% of the debt service on Ambac’s Puerto Rico exposure, most of which is owned by the company at cheaper prices, so this is a huge deal for them. AGO insured a relatively small portion of the junior bonds and also supported the settlement. What is encouraging is that this deal resolves the most complicated aspect of the total debt restructuring for Puerto Rico. Now the stage should be set for a “grand bargain.” The general obligation (GO) bonds have the highest claim on revenues constitutionally, and we expect to see very strong recoveries. 90-95 cents on the dollar wouldn’t be impossible, but I’d be surprised if recoveries were less than 80 cents. That would be a really big deal for AGO, as would the proposed restructuring for the electric utility PREPA. Don’t forget that nearly all of the bond insurer exposure is either to GO debt or revenue bonds, with dedicated revenue streams that must be respected.
“What is encouraging is that this deal resolves the most complicated aspect of the total debt restructuring for Puerto Rico.”
Economic growth on the Commonwealth has been accelerating and unemployment is lower than it has ever been. I know this stuff doesn’t get reported too often in the news, but it is all in the data. PR politicians and the oversight board have consistently tried to make things seem worse economically than they are to improve their negotiating leverage. From the start, they have taken a very creditor-unfriendly approach, but fortunately the United States offers strong protections for property rights and courts generally respect them, whether it is in appeals courts or beyond.
The bottom line is that we are very optimistic on the situation, and the stocks and bonds are still extremely undervalued. When hurricane Maria hit in September 2017, we took an initial hit as prices on the bond insurance companies dropped, but that selloff enabled us to increase our positions by a large margin using sold puts and stock purchases.
“The bottom line is that we are very optimistic on the situation, and the stocks and bonds are still extremely undervalued.”
Nearly all of those sold puts have been successfully monetized or are performing well, while the stocks are up nicely. This is a great example of why we focus on the long-term. That type of fluke scenario hurt our results one year but have helped us since and should continue to for years. We will continue to keep you posted as things develop!
Puerto Rico Wins Approval of $18 Billion Bond Restructuring
Sincerely,
Tim Travis