More About Puerto Rico Debt

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Cate LongOn Sunday I posted an article in which I alleged that the government of Puerto Rico got something north of $200 million above what their credit should have cost.  Since then, Cate Long pointed out that there are several call provisions in this particular bond issue.  The yield, she noted, was yield to call, not yield to maturity.  Hence I need to write more about Puerto Rico debt.

And she’s correct.  The first date on which the call can be exercised is July 1, 2020.  In one of the many odd features of this issue, the call price is par value.  You earn your call premium via the 8% annual coupon (actually two $400 payments per year).  The first coupon is payable on July 1, 2014, a mere 3.5 months after the bonds were issued.

And, of course, the yields are far different.  I’ve updated the Excel workbook, adding a fourth tab that shows the calculations for yield to maturity and yield to call with two payments per year.  Using the quick-and-dirty “annual yield equals two times semi-annual yield” the yield to maturity is 8.63%.  Using the more accurate (1 + r)² – 1 equation gives 8.82%.  Using years to call gives 9.25% and 9.46%$ respectively.

There’s one other gotcha I noticed perusing the documents.  The price shown on Bondview.com was $94 but the EMMA website says the price was $93.  Using that price instead gives the following results:

Years
to maturity / call

Yield
per year

Yield
per year done correctly

20

8.7471%

8.9384%

6.2916

9.4665%

9.6906%

There’s one other not-so-minor issue.  The yield on these bonds really started to rise sharply after April 11.  A few days later there was a supplemental filing by Puerto Rico.  On April 11 their Supreme Court ruled that the government’s attempt to restructure the Teachers’ Retirement System was unconstitutional.  This was one of the risks noted in the original offering document (I’ve pasted together the April 14 document and page 14 from the original filing as a pdf file for your enjoyment.)  It looks like there was a good reason to rush this issue to market.

Conclusion

This is all very well and good, but it really doesn’t change my original analysis.  If anything, it provides additional circumstantial evidence supporting my hypothesis: Puerto Rico really did get away with it.