Personal Finance

If you don't think you own Puerto Rico debt, you're most likely wrong

Key Points
  • Individual investors own the bulk of Puerto Rico bonds, according to Cate Long, founder of Puerto Rico Clearinghouse.
  • To see how much exposure you might have, check with your brokers and mutual fund companies.
Trump: Puerto Rico's debt will have to be wiped out
Trump: Puerto Rico's debt will have to be wiped out

Who really has exposure to Puerto Rican bonds? Chances are, you do.

President Donald Trump singled out Wall Street in his comments on the island's debt on Tuesday. Yet it's individual investors who own most of these investments.

Only about 25 percent of Puerto Rican debt is held by hedge funds, according to Cate Long, founder of Puerto Rico Clearinghouse, a provider of research and analysis on legal and legislative efforts to restructure the island's municipal debt.

Long said there are more than 500,000 individual bondholders and likely hundreds of thousands more investors with small exposure through mutual funds. "It's mainly held in the retail sector," she said.

Retail investors have piled into Puerto Rico bonds in the past decade as they searched for investments promising higher yields. The bonds also held another lure: They are triple-tax free, meaning the interest earned on them generally is free of federal, state or local taxes.

Now, Trump is calling for the island's $70 billion debt to be wiped out, according to an interview he gave Fox on Tuesday.

"They owe a lot of money to your friends on Wall Street and we're going to have to wipe that out," Trump said without specifying details. "You're going to say goodbye to that, I don't know if it's Goldman Sachs, but whoever it is you can wave goodbye to that."

President Donald Trump and first lady Melania Trump walk through a neighborhood damaged by Hurricane Maria in Guaynabo, Puerto Rico, U.S., October 3, 2017.
Jonathan Ernst | Reuters

Following Trump's comments, Puerto Rico's general obligation bonds, which currently yield 8 percent, dropped to 36 cents on the dollar on Wednesday morning. Such a loss would affect people who sold the bond before maturity.

To check whether you have exposure through your mutual fund investments, Long recommends checking the fund's holdings, which they are required to disclose. Investors can get that information by calling the fund company, checking the fund's prospectus or looking at their filings with the Securities and Exchange Commission.

"With so many mutual funds, it's just specific to what the investor holds," Long said. "Not every mutual fund has some Puerto Rican debt in it."

Mark S. Germain, founder and CEO of Beacon Wealth Management in Hackensack, New Jersey, said investors who are invested in the island's debt could find themselves in bad situation if it were wiped out, he said.

Investors should call their broker or fund company to ask exactly what their exposure is, he said.

The president's comments are unlikely to have a long-term effect on the existing investments, according to researchers at BTIG, a provider of trading and fund services.

"Trump's comments may strike fear into some of these investors, particularly if they are not familiar with the facts surrounding Puerto Rico's debt restructuring," BTIG said. "However, in terms of influencing bondholders' ultimate recoveries the interview did not change anything."

Investors in Puerto Rico bonds could see a "meaningful positive" if the Trump administration grants a $29 billion request for aid to the island, according to BTIG.

Though bond prices on Puerto Rico debt were flailing on Wednesday morning, Long said it's likely they will rebound.

"Investors need to give this a little time to shake out," she said. "It doesn't help to run out the door now. They just need to be patient and see what happens."