Puerto Rico Defaults – Our new Muni Book
Cumberland, August 1, 2015
It’s official. Puerto Rico defaults.
Here is a full list of discussions.
As my colleague and co-author, Michael Comes, has described in detail, this is a default on a “moral-obligation” bond. Litigation will certainly start next week. A moral ob. requires an appropriation, and the PR legislature failed to appropriate the money. The reason is simple: they don’t have it. Investors were warned in the documents that were issued with the bonds, so their claim may be a weak one.
But the headline risk of an actual default is serious enough. John Mousseau, the other co-author of our new book, Adventures in Muniland, has written a chapter on headline risk and how to deal with it in the management of portfolios. The new book has just been released and is available on Amazon right now. There is detailed work on Puerto Rico and an extensive review of the muni markets over the last seven years.
When my co-authors and I set up the month of August to release the book, we did not plan for a US jurisdiction and territory to default during the first week the book was available. But here it is: Adventures in Muniland by Michael Comes, John Mousseau, and me. Perhaps it will be a good addition to your summer reading list if you are interested in Munis.
We have a crunch schedule between now and Wednesday morning: Larry Kudlow radio, Alix Steel and Kathleen Hays at Bloomberg TV and radio, Reuters and Maria Bartiromo at Fox Business are scheduled. By Wednesday morning I will be flying to Bangor, Maine. The three authors and the book will be at the Camp Kotok annual gathering at Leen’s Lodge. PR’s default will certainly be a topic of discussion.
Whoddathunkit! Puerto Rico coincidentally defaults in the week that a new book on the financial crisis and the municipal bond market goes to print. Sometimes the timing can accidentally work out.
At Cumberland, we manage many millions in the municipal bond space. Our muni clients are in 49 states. These are all separate accounts. Not one of them owns a single uninsured PR bond. And the insured PR bonds that are owned are very carefully selected according to their structure and priority-claim nature so that we have good reason to believe we will be getting paid. We do not own any uninsured COFINA or GO. We haven’t owned them for some time. We are also avoiding many other American jurisdictions that are seeing deteriorating credit. That includes several states and many cities and agencies.
There are 90,000 possible muni-issuing jurisdictions in the US. This $3.7 trillion market sector requires research and detailed examination. For us this is a daily activity. For interested readers, our book may assist you.
Summer in Muniland is going to get hotter.
David R. Kotok, Chairman and Chief Investment Officer, Cumberland Advisors