Wall Street To The Rescue??

In March of 2011 I had this to say about Puerto Rico and its muni bonds:

The weather is great. The beaches are beautiful. The food is good and the drinks are better. The bonds, on the other hand,don’t get on my “buy” list.

We damn near had a significant problem with PR – there was a real possibility the Island would have been forced to default a few months ago. That’s not the case any longer. Wall Street (and some deep pocket funds) are going to do a private bailout next week.

bondbuyer$3 ‘Large’ will be the largest muni deal ever. The new bonds will have a coupon that pushes 10% – and they will be priced in the hole to give the big-buck buyers a quick boost (retail investors will not see a dime of these bonds). And the IRS will not see a penny of taxes on the interest paid as these bonds a tax-free.

The underwriters stand to make a quick $40+ million in fees. Come Tuesday night, the Champagne will be flowing….(I think the deal will be a blowout success – the whole $3B was all spoken for as of Friday)

The best part of the deal (for the Street) is that the new bonds will be Senior to most of PR’s other $70B of bonds. That’s because PR got rolled over a barrel and was forced to allow these bonds to be subject to NYS law – meaning that the new bond holders can grab collateral, and force the other creditors to the back of the bus when the SHTF.

In my estimation, the $3B deal will buy PR at least 24 months before the next credit crunch hits. I have little expectation that PR is going to turn things around in that period of time, so the crunch will happen.  But that’s so far away that PR, and its financial woes, will fall off the headlines. As that happens, the new bonds are going to rip up in value – a 10% pop in these bonds is a distinct possibility. That would mean that come Tuesday, those who get to play in this sand box stand to rake in an “extra” $300m.

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