There's 'great opportunity' in Puerto Rico: Pro
While there's a "significant amount of risk" in bonds issued by cash-strapped Puerto Rico, the risk-reward calculation is quite favorable, said Paul Twitchell, partner and global head of event trading at Whitebox Advisors.
"We think there's a great opportunity in Puerto Rico. They are coming with a new bond deal," he said on CNBC's "Squawk Box" on Wednesday. "Unlike other markets, you get rewarded for taking risk there. Their [general obligation] bonds are trading at around an 8 percent tax-free yield."
Drawing a comparison to Spain, he said, that country's fiscal situation is as bad Puerto Rico's, if not worse. With five-year borrowing costs at around 2 percent in Spain, investors are not getting rewarded at all for taking that risk, Twitchell added. "In Puerto Rico, at least, you're getting paid."
In its first debt sale since August, the U.S. territory plans to issue about $2.86 billion in general obligation bonds in March.
"We've chosen to take a barbell approach to it," Twitchell said. On one hand, Whitebox—an investment advisor with $3 billion in assets under management—owns the most senior part of the capital structure. "The more aggressive approach is we're actually long the bond insurers that actually insure the bonds," he said. "It's a very risky trade.
"I think the odds are significantly skewed that [things] go very well in the near-term," he added, because much of the risk has been discounted.
Twitchell said he believes the markets will give Puerto Rico a lot of time because "there are a lot of deep-pockets that own a lot of bonds already."
This month, all three Wall Street ratings agencies cut the island's credit rating to junk status—partly on fears that it would struggle to finance its deficit by issuing new bonds.
Puerto Rico has outstanding debt of about $70 billion—nearly four times as much as Detroit, which is bankrupt—and its economy has been shrinking almost continuously since 2006.
Municipal bond funds have been selling Puerto Rico debt, getting out before the downgrade, Twitchell said. Now that the bonds are rated junk, these participants can't buy or hold them anymore, he added, because their charters prohibit it.
"Anytime you have forced selling by rule-based investors, it usually creates a buying opportunity," he said. "And we feel that exists now."
Puerto Rico bonds make up about 2 percent of the $3.7 trillion municipal bond market, which has historically been popular among investors looking for tax-exempt vehicles.