Puerto Rico Municipal Bonds
A potential policyholder of a Puerto Rico investment-linked life insurance contract may be erroneously concerned that Puerto Rico's debt problems could impact their policy. Uninformed investors fear that this is equivalent to Greece where all Financial institutions are affected, or that Puerto Rico will leave the USA and bring in a new currency or the Puerto Rico Government could seize insurance assets to pay off debt. This is all 100% incorrect.
Bear in mind that Puerto Rico is the USA. It has USA laws, USA courts and Federal reserve of local banks is Federal reserve of USA. Its residents are US citizens, immigration is US and everyone and all businesses are protected by US constitution. Puerto Rico is not a separate country. It is part of the USA. The credit rating ceiling of Puerto Rico is the credit rating ceiling of the USA. The only difference is it does not share sovereignty with the US Federal Govt like a State. It is under the control of the Federal Govt. As such the residents cannot vote for members of Congress. In return the Federal Government does not tax Puerto Rico residents or businesses.
The debt problem is caused by municipalities and the government (i.e. equivalent of mayor's office) issuing bonds to US institutions. These were popular because they were the only triple tax free bond sin the USA, i.e. no Federal, State or Puerto Rico tax on the interest coupons. The problem is the municipalities issued to many bonds and now cannot afford to pay the bonds back. Subsequently the bonds are now rated "C". However this is a private matter between the municipalities and the bond holders. The original bond holders were pension and bond funds in the USA. But as the credit rating of the bonds fell, the bond holders sold their bonds to hedge fund at an average price of 75% of the par value.
US law prevent municipalities from declaring bankruptcy so the only solution is for a private agreement that the existing hedge fund bond holders accept a reduced repayment of the bond, i.e. a hair cut. Alternatively perhaps the US Congress may arrange a bail out.
One thing for sure is the Governor or municipalities cannot just seize the assets of Financial Institutions to pay the bonds. Puerto Rico is the USA. It i sunder the protection of US courts with US contract laws. When Detroit went bankrupt, the mayor did not seize the assets of Michigan banks to repay bonds. When Orange county went bankrupt, they could not seize the assets of banks and insurers in California to repay the bonds it issued. This may have happened in Argentina, but Puerto Rico is the USA, with all the protection to investors it offers.
There is no possibility or desire of Puerto Rico leaving the USA. USA would never allow that and the locals want to be a State. There is no concern of US dollars not being the currency as Puerto Rico is the USA.
All reading about the Puerto Rico debt problem will confirm that there is no concern for investors in Puerto Rico Financial Institutions. Its a private matter between bond issuers and bond holders, and has no impact on unrelated parties.
Certainly, none of the Puerto Rico bond issuers are remotely considering to disregard US law, which applies to them fully, and try seize assets of a Segregated Policy Company (protected from creditors by law). And consider the policy assets are in held in custody in large banks outside Puerto Rico.
|Articles and links explaining why Puerto Rico default is not like Greece and does not affect credit ratings of FI in Puerto Rico: