Millions of American Retirees at Risk if Puerto Rico Defaults on Debts

By Adam Shapiro
Published June 29, 2015 FOXBusiness

(Reuters)

The municipal bond market is anxiously waiting to hear how Puerto Rico’s Governor Alejandro Garcia Padilla plans to pay back billions of dollars in public debt. Padilla has already said, “the debt is not payable” and at 5 p.m. ET on Monday he will address the commonwealth’s 3.6 million citizens

Between June 30th and July 3rd, Puerto Rico has to make close to $2 billion dollars in payments on its debt. But making those payments will leave the region essentially broke and unable to cover day-to-day expenses or make future debt payments as early as mid-July. Joseph Rosenblum, director of municipal credit research at Alliance Bernstein expects the 5pm speech to be light on details, “there will be more generalities than specifics and then we enter the phase where hard negotiations begin.”

Puerto Rico has sought help from the US government. Its constitution requires it to pay back lenders and as a US territory it is prohibited from restructuring debt through bankruptcy the way the city of Detroit did last year. Rosenblum expects the speech to rattle the US municipal bond market, “we certainly saw Puerto Rico bonds take a hit this morning. I would expect there will be some impact on the market as a whole in the form of higher borrowing costs. Spreads might widen but I think it ought to be short term.” Rosenblum expects investors may be able to find opportunities as the market digests the news from Puerto Rico.

But the news may be harder to swallow for millions of American investors who are unaware their future is tied to Puerto Rico’s debt. Fund giant Morningstar says half of all US municipal mutual funds hold debt from Puerto Rico. That’s down from the 77% that held Puerto Rican debt in 2013. Millions of American retirees are invested in those muni bond funds which had been considered the least risky and safest of investments.

Rosenblum says, “it doesn’t matter what kind of fund it is you could have Puerto Rico exposure.” In some cases that debt may be uninsured leaving the muni bond funds and their investors on the hook as Puerto Rico forces a restructuring.

http://www.foxbusiness.com/markets/2...ults-on-debts/