Craig Brandon, Eaton Vance’s co-head of municipals, discusses what the bankruptcy of Puerto Rico’s main source of electricity means for muni investors. Speaking on “Bloomberg Markets: The Close,” Brandon also explains why he finds municipal bonds attractive right now.
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Transcript
It is time for our Muni moment and the big story in munis is the price of preppa the Puerto Rico electric utility those bonds are falling after a judge overseeing its bankruptcy ruled that bondholders can claim less than one-third of what they were seeking so
You can see that big drop off in price right there let’s bring in Eaton dance management co-head of municipal’s Craig Brandon for more Craig what do you make of this decision why was the market so caught off guard well I think they’re caught off guard because the creditors the bondholders
Had an agreement from the fall with the fomb the federal oversight management board that’s managing the bankruptcy and that agreement was at 70 cents on a dollar and I think most people thought that that was about where the bonds were going to come out so I think judge
Swain’s uh ruling that it would be worth significantly less that the claim from bondholders there’s about 8.2 billion dollars worth of bonds that were issued by the Puerto Rico Electric Power Authority you know they reduced that claim to about 2.38 billion so that was a significant reduction to your claim
Which then reduces you know your your potential recovery so I I think that caught the market off guard a little bit Yeah and of course the drop in in price really reflects all that this has been an ongoing battle since 2017 so it’s been six years six long years do you see
Bondholders appealing the decision and if so does that set any kind of precedent for any kind of financially challenged utility I think bondholders clearly probably will will challenge like you said it’s been a long time there was an agreement in place at 70 cents on a dollar not too long ago
Um there’s there’s really a lot of moving Parts in this prior to being to you know to being confirmed so um I I think there’s a high likelihood that the bondholders probably appeal because it was just such a a drastic reduction in in what your uh unsecured
Claim is now in in the bankruptcy uh Craig I want to broaden the conversation out a little bit here given that we are towards the end of the first half of the year there’s been a lot of discussion here about I guess what was surprising
In that first half and how it shapes uh investment decisions in the second half and one refrain that I keep hearing from fixed income investors whether it’s in the treasury space or in the municipal space is a lengthening of duration um yeah I’ve been a fan of slightly
Lengthening duration a little bit I think especially in munis right munis are so technically driven where investors have generally done well by buying after big trade-offs so last year the muni Market you know based on the main Bloomberg index was off about eight and a half percent last year so you know
A lot of people look at reversion to the mean it’s a very retail driven Market there was about 120 billion dollars taken out of 40 act funds last year so with the FED looking like they were probably going to start moderating a little bit going into the end of 23 and
With Muni technicals theoretically coming back as sort of wind in your cells wind at your back yeah um I think it was appropriate for people to take a little bit of duration risk so yeah no I I I was in that definitely in that camp when you look at the market right now
The muni Market that is Craig here is there still an advantage here price Advantage yield Advantage tax advantage relative to some of the other asset classes that have popped up in terms of returns over the last few months yeah I think there is definitely some attractiveness in in the mini space so
If you just look at sort of from a yield perspective right I mean the index yield is about a 350. if you take an after tax on that it’s you know it’s almost six percent it’s like a three nine it’s like a 591 so that also remember includes the
Net investment uh interest tax uh that’s a 3.8 percent that munis are also exempt from so I think there’s definitely an income Advantage if you can get to a four percent you’re talking about you know a 675 yield um what I also think the opportunity is
As I mentioned when flows do turn around and come back in the market Muni issuance has been very low this year right Muni issuance is down uh over 25 percent from last year it’s down over 30 percent from two years ago so again if some of that 120 billion dollars that we
Lost last year comes back into the market and you know issuance remains low you can really see prices Gap up just because if issuance doesn’t keep up with it there’s not a lot of bounds around to buy
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