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Wells Fargo's muni bond portfolio manager Lyle Fitterer says if you can stomach the risk, Puerto Rico debt will make you big money

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10/21/2013 | 03:50pm EST


ANCHOR QUESTION OFF-CAMERA (ENGLISH) SAYING:

Let's start with Puerto Rico making headlines this week. It basically went on the offensive, trying to assure investors it's going to honor its debt, it's not going to default. You do hold a small amount of Puerto Rico debt. Would you buy more based on what we heard this week from the Government Development Bank?

LYLE FITTERER, PORTFOLIO MANAGER, WELLS FARGO (ENGLISH) SAYING:

I'm not sure I'd buy more just simply based upon what the Government Development Bank said, but we're going to look at market activity, we're going to look at the select issuers in Puerto Rico. There's a lot of different ones, and depending upon the Dollar price, and what we think the potential outcome is, we could step in a buy a little bit.

ANCHOR QUESTION OFF-CAMERA (ENGLISH) SAYING:

If you decide to hold Puerto Rico debt and take the risk, what would you tell investors that would be the 'safest' type of debt which is already not rated very safely?

LYLE FITTERER, PORTFOLIO MANAGER, WELLS FARGO (ENGLISH) SAYING:

Well, again, I think you need to look across the complex in Puerto Rico. There are a lot of different issuers. There's the COFINA structure, which are the sales tax bonds that are backed by a specific sales tax pledge. There's the GO which depending upon who you talk to people would tell you that that has a first priority lean on the revenues of the government. There are the Puerto Rico elect bonds that are backed by the electrical utility. There are highway bonds. Within the highway structure, there are bonds that we think have better security pledge one structure or the other structure. So again, I think- I don't think it's as easy as saying, 'Hey, if new money comes in, you want to immediately sell it.' If your investor is a retail investor and they have a high aversion to risk, that might be the strategy you want to take and now might be a good time because the markets rebounded a little bit. We were telling people 6 to 12- two years ago to sell their Puerto Rico if they owned it, especially retail investors because the price was still around par. Today, with the Dollar price on some of the securities being as low as $0.60 on the $1, I think you need to take a step back and make an assessment of what do you think the ultimate recovery value is going to be if they were to default, what the value of the insurance might be if there's a monoline insurer that has ensured those bonds, and then what your specified revenue stream is. So again, I don't think it's as easy as just closing your eyes and selling. I would agree that the risk if very high in Puerto Rico. We think they're potentially going to get downgraded as well. But again, it's a work in progress. The government has done a lot I think over the last six months to try and reverse the momentum, to increase revenues, to decrease expenses within the commonwealth.

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