Berko: The Russian Google and Puerto Rican bonds
Tuesday, April 08, 2014 7:00 AM
Dear Mr. Berko:
I was able to purchase 8.7 percent Puerto Rican general obligation bonds at par, and they quickly rose to a premium. That’s a great interest rate, and your thoughts on the long-term safety of these bonds will determine whether I purchase more for my municipal bond portfolio? I also want to speculate with a Russian Internet stock. Most Russian stocks are down since the Ukrainian crisis, and I’d like to take a shot with two Russian issues that have real revenues and earnings. I can afford the risks.
H.O., Joliet, Ill.
I don’t know much about Russian stocks, but I know enough to tell you that many successful Russian companies end up as subsidiaries of the Russian Politburo, or in the portfolios of Vladimir Putin and comrades. Yandex (YNDX-$32.06), often called the Google of Russia, has more than 60 percent of the Russian search engine market, and that number is growing. It does most of the things Google does, but it does them in Russian. Before the Ukrainian brouhaha, YNDX traded in the mid-$40s, and I really like this Russian company. It’s home-ported in the Netherlands, far away from Moscow and the corruptive influence of most Russian companies, which genetically suffer from questionable balance sheets and comic income statements. Meanwhile, YNDX’s revenue growth has been phenomenal – leaping from $9 billion in 2009 to an estimated $51 billion this year and maybe $62 billion in 2015. And there’s no Mickey Mousing with the income statement; YNDX should earn $1.30 this year and perhaps will earn $1.81 in 2015, and it has 360 million shares outstanding, with just $500 million in long-term debt.
Meanwhile, the Russian influence in Ukraine is little different from the blatant U.S. hegemony in Latin America and the Middle East during the John Foster Dulles years. So the 35 percent drop in YNDX is probably temporary. And Credit Suisse, HSBC and Bank of America are recommending the stock with a short-term target of $45.
I don’t know how you were able to purchase those new Puerto Rican bonds, but you made a good score – temporarily. I rang an acquaintance at Morgan Stanley (one of the underwriters) a week before the initial public offering. He said that the issue was oversubscribed, that the interest rate on the long bonds was originally 9.4 percent and that the underwriting group was raising the initial subscription amount from $3 billion to $3.5 billion because the demand was so strong. He also said that the issue was primarily sold to institutions and that the minimum purchase was $100,000. You must have a good friend somewhere, because an 8.7 percent tax-free coupon made this a hot issue that rose immediately to a handsome premium.
But most good things are temporary and end sooner than we expect. Puerto Rico has some of the world’s most beautiful beaches, which may be the island’s only redeeming value. More than 41 percent of the population lives below the poverty line, and it’s poorer than the poorest state in the U.S. So did this friend tell you that in the likely event that Puerto Rico’s financial conditions don’t improve in the next two years, it will have to implement emergency measures, including restructuring (extending maturities) and a debt moratorium? Did he also tell you that Puerto Rico will not reduce its deficit this year, next year or in 2016 and that this $3.5 billion issue will sustain the island for only two years? After that, it’s anybody’s guess. Did he tell you that the Puerto Rican economy has shrunk by 16.2 percent since 2006, that unemployment is 14.3 percent and that labor force participation is among the lowest in the world? Do you know that young professionals (doctors, engineers, teachers) are leaving the island in droves, that 2013 consumer sales and use taxes of $513 million are down from $802 million in 2009, that the island’s tax base is shrinking and that the Legislative Assembly is as crooked as a shillelagh? So, H.O., rather than purchase more of these bonds, you should consider unloading them in the next 12 months.
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