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After Irma pounds Puerto Rico, investors weigh impact on island's popular muni bonds

Key Points
  • Hurricane Irma's destruction also endangers some Puerto Rican bonds, but potentially helps others.
  • The municipal bonds are extremely popular among investors on the U.S. mainland because they're tax free and generally pay a higher yield.
  • Puerto Rico is undergoing a restructuring process similar to a bankruptcy.
Street scene in Fajardo, Puerto Rico, as Hurricane Irma hits, Sept. 6, 2017.
Jose Jimenez | Getty Images

After Hurricane Irma's strike on Puerto Rico, dealing with the personal tragedies and damage from the powerful storm remains front and center for the government.

However, some investors are starting to quietly question the impact on Puerto Rico's widely held, but troubled municipal bonds. They're extremely popular among investors on the U.S. mainland because they're tax free and generally pay a higher yield than most other municipal bonds offered in the 50 states.

Some hedge fund managers believe there may be a potential financial benefit for Puerto Rican bondholders because of this unfortunate tragedy.

Odeon Capital's Andrew Gadlin says the most widely held debt, general obligation bonds, "could arguably benefit from widespread rebuilding on the island and consumer spending with funds from insurance companies and FEMA, which might provide a shot of liquidity into a stagnant economy."

However, other bonds could see serious problems due to damage brought on by the hurricane.

"Power outages and water main destruction would be unequivocally bad for Electric Power Authority and Water Authority bonds issued by the island," Gadlin said.

Irma, one of the most powerful storms to ever hit the Atlantic, has caused widespread damage to Puerto Rico, knocking out power to 70 percent of the island. Power companies say it could be months before all power is restored.

Puerto Rico's Gov. Ricardo Rossello declared a state of emergency in advance of the storm authorizing all necessary expenses from the cash strapped island to deal with Irma.

Spending money is an especially crucial issue in Puerto Rico because of its massive debts to bondholders.

Police patrol the area as Hurricane Irma slams across islands in the northern Caribbean on Wednesday, in San Juan, Puerto Rico September 6, 2017.
Alvin Baez | Reuters

Puerto Rico has about $70 billion in debt on its books and $50 billion in pension liabilities. But due to a law known as PROMESA passed by Congress and signed by President Barack Obama in 2016, Puerto Rico is undergoing a process similar to restructuring under bankruptcy with oversight from a federal judge in New York.

Former Gov. Luis Fortuno who served from 2009 to 2013 and follows Puerto Rico's bond crisis closely as a partner in the Washington-based law firm Steptoe & Johnson, agrees that budgeting for Irma was necessary.

"My assumption is that the judge will continue the [bankruptcy] process as she has so far," Fortuno told CNBC.

Members of the civil defense run as Hurricane Irma howls past Puerto Rico after thrashing several smaller Caribbean islands, in Fajardo, Puerto Rico September 6, 2017.
Alvin Baez | Reuters