Wall Street KOs Puerto Rico Bonds: Why You Should Care

Standard and Poor's delivered a blow against Puerto Rico's key bond grade today. The commonwealth's general obligation bond rating is now below Wall Street's version of the Mendoza Line. Why does this matter? Many investment funds' charters allow purchases of those securities that make the investment grade, so to speak. Considering that, according to a story in today's Financial Times, nearly seven of every ten municipal bond funds include Puerto Rican bonds, the market is poised for a Humpty Dumpty-style great fall.

The Puerto Rican general obligation bonds possess two virtues: they're triple tax-exempt and they offer high yields. In a one-percent or two-percent yield environment, Puerto Rico's nine percent-and-climbing annual reward delivers a powerful incentive to invest. Today's S&P announcement questions the island's ability to repay its debts.

For all the happy talk about the recession being over, we now face the reality of municipal bankruptcies and political entities that require serious financial restructuring. Detroit and a posse of mid-sized California cities have cried fiscal "uncle." Philadelphia, Puerto Rico, and Chicago are not far behind. (By the way, Puerto Rico, unlike Detroit, cannot declare Chapter 9 bankruptcy.) It's an ominous trend for Americans contemplating mid-term Congressional elections and a lame duck presidency.

S&P Downgrades NY Mets' Bonds

Will the bond degrade
mean curtains for Mr. Met? 

The New York Metropolitan Baseball Club, Inc., popularly known as the New York Mets, hit the dirt after receiving a chin-high fastball from Standard & Poor's. The rating agency knocked the Mets' bond rating down to the second level of "junk" status, Wall Street's equivalent of the Mendoza Line. The Mets' bonds are no longer "investment grade," which automatically prohibits certain pension funds, mutual funds, and other institutional buyers from purchasing these securities.

According to a bloomberg.com report, S&P raised concerns about the Mets' ability to meet certain revenue generation thresholds. It didn't take a wizard in financial modeling to realize empty seats and a lackluster squad equalled the proverbial downward slope for performance expectations. Considering the strength of the American corporate bond market, the downgrade is a disturbing event, one which Standard and Poor's and the Mets tried to bury during a slow, year-end holiday news period.

Overarching the ratings determination is the unspoken, but well known impact the Madoff scandal had on the Mets. The prevailing sentiment is that Madoff "made off" with much of the Mets' money. While the Mets' ownership has skated on this issue, the practical result has been the resemblance of the National League's #1 market to a small time operation. That is an unbecoming outcome, from which little good is likely to emerge.