Traditional bond buyers are going back to Puerto Rico.
After shunning the U.S. territory for much of the past six years, municipal-bond mutual funds are again buying the government's debt as it recovers from the 2017 hurricane and inches closer to winning a potential court approval to restructure more than $17 billion of sales-tax-backed debt, a major step in its record-setting bankruptcy.
Pacific Investment Management Co. held about $506 million of commonwealth securities as of Sept. 30, nearly 10 times the $52 million held the month before Hurricane Maria, according to data compiled by Bloomberg. AllianceBernstein increased its exposure to $347 million, as of Nov. 30, up from $53 million in August 2017. Capital Group and Massachusetts Financial Services Co. increased their exposures by nearly 50%.
The increase comes after the price of Puerto Rico bonds rallied on expectations that a stream of federal disaster aid and private insurance cash will give a jolt to Puerto Rico's economy, which has shrunk in the past decade. Its bankruptcy might also speed up this year if a court signs off on the restructuring plan for its sales-tax bonds that would address about a fourth of the island's $74 billion of debt, freeing Puerto Rico to strike similar deals with other creditors.
"It's a very good likelihood that you'll have good growth in the next four to five years and so you have a lot of money that will be spent on the island — so that's good for the economy and that's good for tax collections," said Guy Davidson, director of municipal investments at AllianceBernstein and who helps oversee $42 billion of state and local debt. He said the firm may boost its Puerto Rico holdings if prices are low enough. "They're starting to strike negotiations and come to settlements so the legal risk seems to be cutting down."
In the years before Puerto Rico's fiscal crisis, municipal mutual funds were big buyers of the government's bonds, which paid relatively high yields and are exempt from local, state and federal taxes. But many mutual funds in 2012 began reducing their exposure as former one-term Gov. Luis Fortuno — whom creditors viewed as focused on spending cuts — faced a tough re-election.
By 2013, concern of a Puerto Rico default grew and many mutual funds and individual holders sold their commonwealth securities, pushing the value down to distressed levels. Hedge fund swooped in, eager to pick up cheap bonds sold by a U.S. territory that — at that time — didn't have the ability to file for bankruptcy.