What’s with Puerto Rico GDB bonds?
The bonds of Puerto Rico’s fiscal agent, the Government Development Bank, are inexplicably blowing up today. After a trader alerted me to the sell-off I haven’t been able to find any public information that would explain why.
The GDB bond in the graph above is Cusip 745177FN0 due 2019. It was issued in 2012 for $500 million. The bond is taxable and its yield is hovering around 13.2 percent on inter-dealer trades today (trades done between dealers are the sharpest prices in the market).
In contrast, Puerto Rico tax-exempt general obligation bonds of the same maturity are trading at around 6.74 percent, or 11.16 percent on a fully-taxable equivalent basis. Why did the GDB bond move out 2 percent on heavy trading?
The GDB, like any financial institution, has to be evaluated on its balance sheet. The bank solely relies on loans it makes to collect revenue and repay other loans. All the borrowers from the GDB are public corporations, government agencies or Puerto Rico municipalities. Net assets of the bank were $2.21 billion as of March 31, 2013. It carries a BBB- rating from Standard & Poor’s (page 59).
The top ten borrowers of the GDB are shown above. The GDB values its loans to public corporations and municipalities at par. At least one borrower, the Tourism Development Fund, has been writing down loans it had made for tourism construction and had an operating loss of $223 million for the fiscal year ending June 30, 2012 (page 7). For 2012, the Tourism Development Fund had a deficit of $66 million. It’s very difficult to be certain of the value of the GDB’s assets.
The general economy of Puerto Rico has been slowing. Many believe that increased taxes will further contract the economy, and tax collection has always been difficult in Puerto Rico. Something bigger is happening at the GDB though, if market signals are correct. Email me with information or tips.