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Increase in hedge funds trading Puerto Rico bonds, says Fitch

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The number of hedge funds trading Puerto Rico (PR) bonds is increasing, although exposure to specific credits has become bifurcated by whether they support or oppose the new Public Corporation Debt and Enforcement Recovery Act, according to a report from Fitch Ratings.

Fitch estimates there are now over 60 alternative fund managers holding more than USD16 billion of the island's debt in aggregate.
Some of these fund managers support the Recovery Act in order to ring-fence commonwealth obligations from PR public corporations while others are suing to annul it.
On the traditional side, total US mutual fund ownership of PR bonds has declined to 52 per cent of the USD65.1 billion market. But the remainder is concentrated among two large US fund managers who together hold more than USD23 billion of PR bonds.
In contrast, Fitch-rated US closed-end funds across 14 other fund managers have reduced their PR holdings on average by 65 per cent since summer of 2013. Remaining exposure is being held in sales tax and general obligation issuers, half of which is insured.
A review of 125 Fitch-rated municipal closed-end funds across 14 large fund managers shows they began reducing Puerto Rico exposure in the summer and fall of 2013. Remaining exposure as of August is predominately invested in COFINA and general obligation issuers. Overall, municipal funds have reduced PR exposure by 65 per cent on average.
Fitch estimates that over USD23 billion, or 36 per cent of the USD65.1 billion Puerto Rico bond market, currently carries monoline credit protection, which provides a secondary source of repayment.

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