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Investors would be wise to keep an eye on funds that have the most exposure to Puerto Rico debt as the island faces unprecedented devastation from Hurricane Maria.
Puerto Rico had already racked up more than $70 billion in debt before the storm. And with a new request for $1.4 billion in federal aid from Gov. Ricardo Rossello, the island's shortfall doesn't look like it will end any time soon.
The situation led one Columbia Threadneedle Investments executive to declare that the possibility that Puerto Rico bondholders will recover all their money has "dwindled" in a blog post Monday.
"Long before Hurricane Maria, we believed that Puerto Rico bondholders should expect significant losses," wrote Chad Farrington, head of municipal bond credit research and senior portfolio manager at Columbia Threadneedle. "Now, the economic outlook is further weakened by the effects of the hurricane."
That prediction comes as the island's revenues that are diverted to help with rebuilding efforts could reduce the likelihood bondholders will recover their funds, according to Farrington. In addition, the island's population could shrink if a trend toward migration elsewhere accelerates due to slow recovery efforts, he said.
Puerto Rico's debt made headlines last week, as President Donald Trump called for the island's debt to be "wiped out." The president's comments prompted Puerto Rico's general obligation bonds to drop to 37 cents on the dollar.
The majority of those bonds are held by individual investors, Cate Long, founder of research organization Puerto Rico Clearinghouse, said in an interview. Investors piled into the debt amid a hunt for bigger returns and the prospect of reduced taxes on their gains; the interest on Puerto Rico's debt generally does not require investors to pay local, state or federal taxes.
As a result, experts point out that investors should be vigilant about investigating whether they own Puerto Rico debt and, if they do, how much they own.