Bond traders say appetite for Puerto Rico is high

Prominent bond traders said appetite for restructured Puerto Rico bonds is high and the future will likely bring greater market acceptance.

Puerto Rico’s local government, through its Fiscal Agency and Financial Advisory Authority, brought the five traders to talk about the bonds at its PRNow conference in New York City Friday.

“There’s an enormous demand for this product,” Bryce Pickering, head of trading at Barclays, said of the restructured bonds. 

Jared Fand, executive director of high yield municipal trading at JPMorgan, said his desk traded $5 billion in restructured Puerto Rico bonds in 2023. Institutional investors, he said, are “flooding” into Puerto Rico debt.

There is a distinction between the demand for the Puerto Rico Sales Tax Finance Corp. (COFINA) bonds and the general obligation and other bonds, Pickering said. A wider set of buyers have been buying the COFINA bonds than the others.

Elliot Mutch, senior trading strategist at BofA Securities, agreed, saying it is overwhelmingly high-yield investors who buy non-COFINA Puerto Rico bonds.

Vic Kalaydjian, co-head of municipal sales, trading, and research at Jefferies, said Puerto Rico has a “past and a future reality.” The reality of the past five to seven years are the defaults and restructurings. These will leave “scars and bad memories.”

However, the island is coming out into a better situation, Kalaydjian said. It is coming out of the restructuring with a smaller debt stock, a sounder fiscal and budgetary policy, and more sustainable economic growth. He compared its current situation to that of New York City in the 1970s.

Puerto Rico’s government needs audited financial results, solid legal security and flow of funds, responsible debt issuance, and better ratings on future bonds, Kalaydjian said.

Puerto Rico’s finances have already taken a positive turn, Pickering said, but capital market participants need to gain trust through the establishment of “guardrails” on local government action.  

After the session, Brian Olson, director of municipal products at RBC Capital Markets, said for investors to continue to gain confidence in Puerto Rico’s bonds, the government must deliver on its promise of fiscal discipline. Olson also said the local government must establish “guardrails” that it will operate within.

In a conversation after the session, Puerto Rico Treasury Secretary Francisco Parés said the Treasury Department was making headway on two initiatives to improve revenues.

Puerto Rico has historically had a problem with tax evasion. Parés said in the last few years his department had taken steps to reduce this.

It introduced a computerized “GenTax” platform to centralize the monitoring of all tax streams.

The local government passed a law in 2018 to require independent contractors and some others who claim deductions to file a form like the Internal Revenue Services’ 1099 form.

The department increased the capture rate on sales and use tax from 58% to 77% by using a reporting system. Finally, the Treasury has increased cooperation with the IRS.

With better information coming in, since 2021 the department has been able to detect and prosecute bigger tax evaders than it had, Parés said.

Parés said the rollout this year of the Act 52 tax on U.S. and foreign companies operating on the island to replace the Act 154 tax, has been going smoothly.

In the next year or two, revenues will probably be a bit lower than they would have been with the Act 154 tax, he added. However, over the next 10 years, he said, he expects to be able to collect more with Act 52 than he would have had Act 154 continued.