Four Lessons For Investors from Puerto Rico And Toys R Us Defaults

The defaults by Toys R Us and Puerto Rico were remarkably similar, even though corporate debt and sovereign debt are quite different. This article highlights three lessons that can be taken from both and one lesson that highlights a key difference between corporate and sovereign debt.

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Deteriorating Slowly but Defaulting Suddenly

Both Toys R Us and Puerto Rico followed Ernest Hemingway’s description of going bankrupt “gradually, then suddenly.” For years both had limped along in financial distress, but investors continued to buy their debt. There’s a false comfort in the non-default of stressed borrowers; investors can start to assume that as default didn’t happen previously, it is unlikely to occur in the near term. The sudden drop off in bond prices for...