Puerto Rico returned to the headlines on May 1 after the commonwealth announced that it would default on $400 million in debt of its Government Development Bank (GDB). (The GDB did reach a tentative agreement with a group of investors to extend some of the bond maturities, though the complete details of the deal are not yet clear.)

This latest development in Puerto Rico’s long-running fiscal drama is receiving a great deal of attention—and, as has been the case for many months now, some political spin. As such, we think this is a good time to take a step back and review the current environment for Puerto Rico’s municipal bonds. In doing so, it is important to take emotion out of the situation in order to better understand all points of view. Here, we present nine points that should be included in this analysis.

1) Bankruptcy
One of the main topics that often is being reported incorrectly in the media, and stated incorrectly by some politicians to influence the outcome, relates to municipal bankruptcy, which is often referred to as “Chapter 9.” The press has reported that some politicians have claimed that they want Puerto Rico to have the same right to declare bankruptcy that the 50 U.S. states have. What is being misreported, however, is that under current law, the 50 states cannot declare bankruptcy or use Chapter 9 themselves. States, since 1937, can allow their municipalities to declare bankruptcy, but that is not possible at the state level. Repeated assertions of this claim in the media have fostered widespread misperceptions about its validity.

2) Bondholder Negotiations
The Puerto Rican government has not been actually negotiating much with bondholders. Officials have been putting most of their energy toward trying to influence the U.S. Congress (Congress) to change laws in their favor. Creditors actually have made proposals to Puerto Rico regarding concessions, but they aren’t receiving constructive responses. The Puerto Rican government has made media statements suggesting that it is trying to work with bondholders, but these mostly have been inaccurate.

It seems likely that the government will not enter into serious negotiations until it gets a clear sense of whether it can get a favorable response from Congress, or until it reaches an actual payment deadline. The U.S. Supreme Court is also reviewing a case bearing on Puerto Rico’s ability to impair bondholders; that opinion is expected to come in June. So, much of the delay in reaching a resolution is due to the Puerto Rican government waiting to see whether Congress or the U.S. Supreme Court will provide the commonwealth a stronger hand in bondholder negotiations.

3) The Financial Situation
The Puerto Rican government has not released audited financial statements for several years. The financial information that has been released to the media has not been confirmed as accurate by auditors. Some members of Congress are comfortable supporting aid for Puerto Rico without seeing independently verified information, while others are not. It is tough to take all the information the government is providing as actual facts without an independent audit, since officials are making such an aggressive attempt to have Congress change laws in the commonwealth’s favor (basically giving it different status than actual states). The government often announces that it is close to releasing years-late financials, but it has repeatedly missed its self-determined deadlines.

4) U.S. Congressional Action
Congress has been trying to draft a bill in response to the Puerto Rico situation, but both parties have been unable to come to an agreement on a final version, and many details need to be ironed out for any legislation to pass. So far, the main components of the proposed bill have been an independent financial control board similar to what some distressed cities have had in the past; a framework to more aggressively work toward a negotiated agreement with creditors; and efforts to create some incentives to boost the island’s economy. Some of the main points of disagreement are how strong to make the control board, how aggressively creditors should be forced into any settlement, and whether to constrain creditors from taking legal action against Puerto Rico. One other important consideration is what type of precedent any legislation might set in terms of addressing the troubles of other distressed municipal bond issuers. Congress already has missed various deadlines to reach an agreement, so now the timing has become uncertain, and meaningful action is unlikely to occur before major issues need to be resolved.

5) Investment Decisions
It is important to understand which factors need to be analyzed in determining whether to make investments in Puerto Rico bonds. First, it is worth remembering that the commonwealth is a significant issuer in the U.S. municipal bond market; more than 20% of the benchmark Barclays High Yield Municipal Bond Index is composed of Puerto Rico bonds. Since that index serves as the representative benchmark for many high-yield municipal bond funds, Puerto Rico is a huge part of the investible universe for those funds. Thus, Puerto Rico munis are a very appropriate and necessary investment if a portfolio remains bounded by the strategy outlined in its prospectus. An allocation coming anywhere near the actual index weighting would be considered extremely high for high-yield muni funds, but some investments in Puerto Rico are warranted for portfolios in this category.

Second, the decision to invest in Puerto Rico munis needs to be based upon current bond valuations, not the prices at which they were originally issued. Some bonds trade at 40 cents on the dollar, some at 50 cents, and some as high as 65 cents. Some issues with bond insurance are trading near par. So, given these prices and factoring in the future financing needs of the Puerto Rican government, it is very possible that there could be positive outcomes for bondholders at today’s prices. Clearly, there is a lot of uncertainty, but, we believe, the current prices reflect that.

6) Current Puerto Rico Investors
It also is clear that many muni-bond mutual funds hold Puerto Rico bonds, and many do not. This information always has been available in regular reports provided by fund companies and on their websites. Because there are a range of investor approaches toward investments in Puerto Rico’s debt, there too are a variety of opinions about how Congress and the Puerto Rican government should handle the situation. Significantly affecting these opinions are the relevant concerns of those holding the commonwealth’s muni debt, along with the potential longer-term implications the outcome of Puerto Rico’s situation might have for state muni-bond issuers in the United States. Some states are facing less dire challenges, but they are finding resistance to solutions to long-standing fiscal issues and could seek outside sources to help them in the future. There are laws restricting the U.S. federal government from interfering with some state-level laws, and that plays significantly into this topic as well. So, it is important to remember that some investors are more vocal than others and that opinions vary widely.

The Puerto Rican government has focused upon the hedge fund investors who have purchased bonds in the secondary market, but those investors only represent about one-third of the bondholders.1 Much of the rest of the island’s roughly $70 billion in muni bonds are held by mutual funds owned by retail investors, and by brokerage accounts for investors both on the island and around the country. Members of public pension plans definitely will be affected by any future settlement of the commonwealth’s debt difficulties, but so will many other individuals, including retirees who were advised to invest in Puerto Rico bonds as a fixed-income alternative.

7) Bond Market Action
Prices for Puerto Rico bonds have not fluctuated too much recently because there is not much new information. The news of the GDB default did not create much market activity because it already had been widely expected. Yet, while Puerto Rico bonds have not been at the top of the performance list this year, most have provided positive returns.

Meanwhile, the recent headlines on Puerto Rico do not appear to have had an effect on the broader municipal market. The Barclays Municipal Bond Index was slightly positive in the two trading sessions following the announcement on May 1, and as of May 3, had returned 5.6% over the prior 12 months despite the ongoing headlines about Puerto Rico’s troubles.2 This suggests that investors have been able to isolate the commonwealth’s difficulties from the broader muni bond market.

8) The Current Situation
So where does that leave us? The Puerto Rican government is clearly stressed, and the island’s economy is in decline. This is not new information, as the downward cycle has been ongoing for more than a decade. The commonwealth’s challenges are daunting, but because the government hasn’t released audited financial information for a while, and because it is exerting every effort toward pushing Congress for a legislative solution, it is tough to quantify Puerto Rico’s exact situation. The island is losing population due to its weak economy, and its unemployment rate is much higher than that of the rest of the United States. The government clearly needs help in turning the economy in the right direction, but it also needs to improve tax collections and focus on initiatives other than having Congress rewrite bankruptcy laws.

With Congress moving slowly, a resolution to the situation will also will move slowly. The Puerto Rican government is unlikely to seriously engage with creditors until it finds out if it can improve its negotiating position, with help from Congress. In the meantime, officials will continue to use public statements to try to influence the situation, perpetuating the uncertainty. Eventually, the Puerto Rican government will need to negotiate with all bondholders.

9) What’s Next?
The next big date for Puerto Rico is July 1, 2016, when payments are due on general obligation bonds. These bonds have the highest position in the security structure, based upon the Puerto Rican constitution, so they are supposed to be paid before any other expenses. If the government chooses not to make the required payments, it likely will trigger legal action by creditors and lead to entangling the U.S. Supreme Court with regard to the outcome. This surely will happen unless the Puerto Rican government chooses to negotiate with creditors in advance. Going forward, the headlines could be challenging, but we see the possibility of a resolution occurring within the next few months.

Daniel S. Solender, CFA, is a Lord Abbett partner and director of municipal bond management.