Puerto Rico muni bond (insured) settlement question

[Weathering]

I've owned a small amount of a Puerto Rico Highways&Transportation muni bond (purchased because it was insured by Assured Guarantee) for a few years now (cusip: 745190ZS0). My cost basis is a few dollars less than the face value of the bond. The interest has always been paid in a timely, consistent manner. Last week, I was notified of a corporate action for which I can choose one of two options. However, it is difficult to figure out precisely what the two options offer. I would appreciate any advice or how to go about getting more information.

Here is the text from the corporate action:
"As a part of the Title III plan of Adjustment of the Puerto Rico Highways and Transportation Authority, dated June 17, 2022, holders of the Assured Insured Bonds may elect their form of distribution under the Plan.

Assured Bondholder Election 1: On the HTA Effective Date, you will receive from Assured the applicable Assured Acceleration Price equal to the outstanding principal amount of the Assured Insured Bonds held by you, plus the accrued and unpaid interest.

Assured Bondholder Election 2 (Default): You will opt into a custodial trust structure established by Assured (as further described in the Disclosure Statement Order and affiliated documentation) that will provide you with an interest in the applicable Assured Insurance Policy and the applicable Assured Plan Consideration in accordance with terms acceptable to Assured."

I believe that option 1 would pay me the face value of my bonds very soon (August 2022). But I can't figure out option 2. If Option 2 would keep the bond going, with insurance from Assured, then I would choose it and hold the bond to maturity. However, I'm concerned that Option 2 may be a replacement of my bond with a new bond with a lower face value based on a settlement between Assured and Puerto Rico.

[Weathering]

I've read all that I can, and I think my options are:
Option 1: Agree to be paid 100% of face value by Assured on the day the final agreement is approved (August).
Option 2: Do nothing, and the result will be that Assured will pay 100% of face value upon 30 days' notice. 30 days' notice can be given by Assured on the day the final agreement is approved or any day thereafter.

So, it seems like I can get an immediate payout of the face value or let the bond continue (it will transition into a trust agreement with Assured) with the expectation that Assured will pay it off when they want to (probably 30 days after the agreement is approved).

[Weathering]

I found a better description for this corporate action on the Assured Guaranty website. It confirms that the two options I'm given are: 1) Get paid the face value of my Puerto Rico bond immediately in August, or 2) Get paid according to the original schedule of interest and principal until Assured Guaranty calls the bonds (which will be not less than 30 days from the court approval date in August, but is expected to be soon thereafter).

"Assured Guaranty has offered the holders of the Schedule B Bonds (Schedule B Bondholders) a choice of two Assured Bondholder Elections:

Assured Bondholder Election 1. If the Plan is confirmed by the Title III Court, then on the HTA Effective Date, Schedule B Bondholders who elected Assured Bondholder Election 1 will be paid the applicable Acceleration Price.
Assured Bondholder Election 2. If the Plan is confirmed by the Title III Court, then on the HTA Effective Date, the Schedule B Bonds whose holders elected, or were deemed to have elected, Assured Bondholder Election 2 (the Election 2 Bonds) will be exchanged for certain Trust Units (described in greater detail immediately below).
The Trust Units represent an interest in a custodial trust or similar structure established for the related Election 2 Bonds that holds: (a) certain New HTA Bonds, and/or cash1, delivered by HTA or the Commonwealth on the HTA Effective Date; and (b) the AGM or AGC insurance policy related to the Election 2 Bonds (the Legacy Insurance Policy). As of the HTA Effective Date, the Legacy Insurance Policy continues to insure, in accordance with its terms, payment of principal (the Legacy Insured Principal) and interest (the Legacy Insured Interest) in the original amounts, and on the original payment dates, as the Legacy Insurance Policy insured for the Election 2 Bonds immediately prior to the exchange, subject to the below.

The Trust Units have a Notional Amount equal to the Legacy Insured Principal amount. Therefore, at the HTA Effective Date, the Notional Amount of the Trust Units will equal the outstanding principal amount of the Election 2 Bonds immediately prior to the exchange.

As the trust receives (i) cash delivered on the HTA Effective Date by HTA or the Commonwealth, if any, (ii) payments on the New HTA Bonds, and (iii) proceeds from the sale of any New HTA Bonds, it will promptly distribute this to the Trust Unit holders. Such cash distributions, as of the date they are made, will first pay accrued Legacy Insured Interest and then Legacy Insured Principal and, as a result, reduce the Notional Amount of the Trust Units. To the extent the distributions described in the immediately preceding sentence are insufficient to pay or prepay Legacy Insured Interest and/or Legacy Insured Principal on or before an originally scheduled payment date, AGM or AGC will make such payment in accordance with the Legacy Insurance Policy.

Consistent with the terms of the Plan and Assured Guaranty’s rights under the applicable insurance policies, Assured Guaranty will retain the right to satisfy its obligations under its Legacy Insurance Policies at any time thereafter, with 30 days’ notice to the relevant Trust Unit holders, by paying the Acceleration Price."

[muppetspuppet]

Was just researching this topic and wondered what you decided to do? I was in the same boat and opted for option 2.

[Weathering]

Was just researching this topic and wondered what you decided to do? I was in the same boat and opted for option 2.

Awesome! I opted for option 2 also. Your post gives me more confidence that I didn’t royally mess it up.
My final view on this choice is that option 1 is choosing to be paid out 100% of face value instead of proceeding with the agreed settlement. Option 2 is choosing to move forward in accepting the agreed settlement while still keeping the AGC insurance policy (and AGC maintains the right to effectively call the bond at any time on or after the settlement date). In both cases, I expect these bonds to be paid off and closed within 30 days.

[Weathering]

These muni bonds from Puerto Rico were settled on Tuesday 12/06/2022. PR paid out what the judge required and Assured Guarantee insurance paid the rest. Not sure how quickly the funds will get to each bond holder, but I’m guessing it will be days not weeks.
Onward and upward wishes to the PR island nation. I’m glad I participated in helping continue PR’s access to municipal capital through my small bond purchase.

[Weathering]

This settlement of the Puerto Rico HTA bonds (insured by Assured Guarantee) has become interesting. Assured Guarantee has taken over the bonds fully and accepted payment from Puerto Rico. New municipal bonds have been issued to the prior owners (terms match the original bonds). However, the new muni bonds show the state being Delaware rather than Puerto Rico (I think this is because they are issued by Assured Guarantee which is incorporated in DE). The result is that they may not be state tax-free for anyone except holders in Delaware. The next payment is in January of 2023, so at least there is a year to figure out if they really are Delaware muni bonds or if holders in other states can also claim them as tax free. Fortunately, muni bonds for Delaware sell for a lower yield than many other states, so these new (puerto rico / assured guarantee) bonds are trading slightly above par value.

[handsonart]

@Weathering. Just came across the issue regarding PR bonds issued showing state being Delaware but can't find any information regarding if they are to be treated as Delaware muni bonds or if holders in other states can still treat them as tax free. Did you ever find more information on this topic? Would really appreciate knowing. The security description still labeled starting with PR. It is very confusing.

[crefwatch]

I carelessly ended up with option two, and was issued about half the bond's value in cash, and about 14 tiny holdings (below minimum lot size for Vanguard brokerage bond sales!) with much longer maturities. Very unpleasant result. They are all trading well below face value. Note that even though the "face value" and the cash distributed add up to roughly the value of the bond that disappeared, there is no assurance that the new bonds will actually deliver all of their face value in my lifetime (or even when my executor tries and fails to sell them to get rid of the annoying holdings.)

I'm referring to the 2022 "Restructuring", which is not the first plan, which might have been called PROMESA.

viewtopic.php?t=384740

[Weathering]

@Weathering. Just came across the issue regarding PR bonds issued showing state being Delaware but can't find any information regarding if they are to be treated as Delaware muni bonds or if holders in other states can still treat them as tax free. Did you ever find more information on this topic? Would really appreciate knowing. The security description still labeled starting with PR. It is very confusing.

I haven’t looked into it yet. Will need to figure it out before March 2024 for 2023 taxes (all the interest in 2022 was as a Puerto Rico muni - tax exempt in every state). There isn’t an official statement for the new bonds - that is where the state of issue would be found. I asked Vanguard to get me an offer (bonds were trading slightly above par) and it came back at 98 cents on the dollar. I declined. At this point, I plan to hold the bond to maturity. Assured Guarantee has a solid credit rating so I’m not worried about default and 5.25% is a fine interest rate for a long bond that is federally tax exempt. If I end up having to pay state tax on the interest then it won’t be too bad.

If you find out anything about the state tax aspect of these bonds then post it here, and I’ll do the same.

[handsonart]

@Weathering. Thank you for responding. I'm not sure about the interest in 2022 "as a Puerto Rico muni -tax exempt in every state" - on tax form listed under "other state: DE", and not under "PR". I don't see anything that specifically says "all" interest in 2022 was as a Puerto Rico muni. How do you know all interest in 2022 was as a Puerto Rico muni? Wondering if listed under tax exempt page because of federal exemption status. Still working on getting a clarification from brokerage, yes -will let you know if/when I get more info.

[Weathering]

@Weathering. Thank you for responding. I'm not sure about the interest in 2022 "as a Puerto Rico muni -tax exempt in every state" - on tax form listed under "other state: DE", and not under "PR". I don't see anything that specifically says "all" interest in 2022 was as a Puerto Rico muni. How do you know all interest in 2022 was as a Puerto Rico muni? Wondering if listed under tax exempt page because of federal exemption status. Still working on getting a clarification from brokerage, yes -will let you know if/when I get more info.

My Detail for Tax Exempt Interest from Vanguard shows the bond PR ST HIGHWY 5.25 070136 with a state of PR and payments on 01/01/2022 and 07/01/2022. I don’t see any mention of Delaware for the 2022 interest payments.
January 2023 was the first interest payment after the conversion, so I think that is the first one to possibly be for Delaware. Still a little time to figure that out before 2023 taxes in 2024.