The S&P Municipal Bond Puerto Rico Index has experienced a 26.41% bond performance uptick thus far this year, giving investors with an appetite for high yields food for thought when looking for fixed income opportunities in the municipal bond market.
In particular, ETFs with exposure to Puerto Rico bonds have been benefitting from the rise in the index, such as the VanEck Vectors Short High-Yield Muni ETF (NYSEArca: SHYD) and the VanEck Vectors High-Yield Municipal ETF (NYSEArca: HYD).
SHYD seeks to replicate the price and yield performance of the Bloomberg Barclays Municipal High Yield Short Duration Index. SHYD invests In securities that comprise the benchmark index, which is composed of publicly traded municipal bonds that cover the U.S. dollar denominated high yield short-term tax-exempt bond market.
HYD seeks to replicate the performance of the Bloomberg Barclays Municipal Custom High Yield Composite Index. Like SHYD, HYD normally invests in securities that comprise the benchmark index, which is comprised of publicly traded municipal bonds that cover the U.S. dollar denominated high yield long-term tax-exempt bond market.
Based on Yahoo Finance performance figures, SHYD has returned 3.06% year-to-date and 2.77% within the past year. As for HYD, it has returned 3.62% YTD and 4.81% the past year.
The country of Puerto Rico was already saddled by debt, but last year’s devastation brought forth by Hurricane Maria only exacerbated their financial situation, among other things. In order to pay its bills, the government of Puerto Rico was already borrowing insurmountable amounts of money, but in the wake of the country’s rebuilding, it appears the country may be getting the assistance it desperately needs.
“More recently, there’s been good dialogue between the government of Puerto Rico and creditors about the potential for restructuring,” Michael Cohick, Senior ETF Product Manager at VanEck, told ETF Trends.
Creditors Approve Puerto Rico Bond Restructuring
Creditors recently approved a plan to restructure Puerto Rico’s debt issues from the country’s insolvent Government Development Bank. It’s the first debt restructuring under the 2016 Puerto Rico Oversight, Management, and Economic Stability Act, which was originally designed to help alleviate the country’s $120 billion debt and pension liabilities.
Since May 2017, Puerto Rico has been attempting to restructure its debt through a combination of filing bankruptcy via the U.S. court system and making deals with creditors. Final approval for the debt restructuring, expected around Nov. 6, rests in the hands of Puerto Rico’s federally appointed financial oversight board and U.S. Judge Laura Taylor Swain.
Looking at the fine print of the restructuring deal, the GDB would transfer loan portfolios, real estate assets and cash to a GDB Debt Recovery Authority portions to help pay back the $4 billion of debt it owes. In turn, the GDB Debt Recovery Authority would issue new bonds backed by a statutory lien on the transferred assets equal to 55% of the debt owed.
For more trends in fixed income, visit the Fixed Income Channel.