×

Hedge-fund billionaire Klarman says Puerto Rico should pay its debts

  • Baupost owned $911 million of the island's bonds through Decagon Holdings entities, according to a July public court filing.
  • "In the case of Puerto Rico, expunging the debt would almost certainly eliminate any ability the Commonwealth would have to borrow money in the future at reasonable rates, which will be critical to the island's rebuilding efforts," Klarman writes in an investor letter.
  • The firm has $30 billion of assets under management as of March 2017.
Seth Klarman, founder of the Baupost Group
Daniel Acker | Bloomberg | Getty Images
Seth Klarman, founder of the Baupost Group

Seth Klarman, the value investing giant who draws comparisons to Warren Buffett, is telling his clients it is in Puerto Rico's interest to pay its debt.

Klarman's hedge fund, Baupost, owned $911 million of the island's bonds through Decagon Holdings entities, according to a July public court filing. The bonds were issued by the Puerto Rico Sales Tax Financing Corp., which goes by the acronym COFINA.

"Baupost first purchased COFINA bonds in the secondary market in 2015, with our most recent purchases made in 2017 before Hurricane Maria hit Puerto Rico," Klarman wrote in an investor letter Wednesday obtained by CNBC.

"Our investment was premised on deep fundamental research both around the Commonwealth's ability to repay its obligations as well as a legal analysis regarding the priority and property rights of COFINA bonds relative to other debt issues with respect to valuable collateral," the letter said.

Last month the island was hit by Hurricane Maria, a Category 4 storm that left widespread devastation and wiped out electric power for most of the population. Puerto Rico currently has more than $70 billion in debt and is already in a type of bankruptcy status as it tries to negotiate with creditors.

There have been calls for debt forgiveness as Puerto Rico struggles to recover. President Donald Trump himself pledged to wipe out its debt in an interview with Fox News earlier this month. The island's general obligation bonds fell to 31 cents on the dollar Friday versus 56 cents on the dollar last month.

The hedge-fund billionaire pushed back on debt forgiveness talk.

"While the impulse of the advocacy groups to demand the debt be expunged may be well intentioned, it is impractical for several reasons," he wrote. "In the case of Puerto Rico, expunging the debt would almost certainly eliminate any ability the Commonwealth would have to borrow money in the future at reasonable rates, which will be critical to the island's rebuilding efforts."

Klarman also said one-third of the COFINA bonds are owned by Puerto Rican citizens and community banks on the island. "The elimination of Puerto Rico's debt would have a devastating effect on the savings of many Puerto Ricans," he wrote.

The investor admitted his firm acquired the island's debt through "special purpose vehicles" such as Decagon Holdings so competitors wouldn't find out his firm was buying the bonds, which "could have an adverse effect on our ability to trade."

Baupost did not respond to a request for comment on the letter. The firm has $30 billion of assets under management as of March 2017.

The hedge-fund manager has largely avoided controversy over his career and is often compared with Buffett for his disciplined investing philosophy and solid returns. Used copies of Klarman's 1991 "Margin of Safety" investment book still sell for nearly $700 online.

— CNBC's Leslie Picker and Fred Imbert contributed to this report.

WATCH: CNBC's crew traveled through Puerto Rico two weeks after the hurricane