Puerto Rico municipal bonds

Will Puerto Rico Municipal Bonds Default?

January 9, 2014 | by Staff Attorney

This question is on the minds of many investors. Many clients and potential clients have contacted our firm concerned about the effect of a default on their UBS Puerto Rico municipal bond funds that are heavily invested in the island’s debt

The UBS Puerto Rico bond funds, including the Puerto Rico Fixed Income Fund and the Puerto Rico Investors Tax-Free Fund series, invested up to 140% in Puerto Rico debt through the employment of leverage. The extreme use of leverage has exacerbated recent declines. As losses continue to increase clients tell us very similar stories about how their brokers recommended that they invest as much as 100% of their portfolios in the UBS Puerto Rico closed-end funds.

Now our clients worry about a potential Puerto Rico default on its municipal debt. Puerto Rico’s public debt of $53 billion is nearly $15,000 per person. When you add on the severely under-funded pension and healthcare obligations, the amount of debt approaches $160 billion, or $46,000 per person.

UBS Puerto Rico Bond Fund Sales Practices Come Under Fire

December 8, 2013 | by Staff Attorney

UBS Puerto Rico operates 23 proprietary non-exchange-traded closed-end funds (UBS Funds). UBS is one of the key players in the Puerto Rico municipal debt market and has packaged and sold approximately $10 billion in municipal debt through the UBS Funds.

It has been alleged that UBS marketed the UBS Funds to customers as income producing municipal bond funds that were designed to preserve investor principal. Over a number of years, UBS allegedly had its advisors over-concentrate thousands of its Puerto Rican clients in the UBS Funds. However, at the same time that UBS recommended the UBS Funds to clients, UBS allegedly liquidated its own UBS Fund assets due to the firm’s internal analysis that found that the Funds contained excessive risks.

Over the summer of 2013, the market for Puerto Rico’s $70 billion municipal debt began to evaporate. As the value of the UBS Funds has plummeted by 50-60% in value in a matter of months investor complaints filed with the Financial Industry Regulatory Authority Inc. (FINRA) have increased.

Gana LLP Investigates UBS Puerto Rico, Popular Securities, and Santander Securities Sales of Puerto Rican Bond Funds

October 8, 2013 | by Staff Attorney

The steep decline in prices of Puerto Rican bonds has caused local investors substantial investment losses in assets that many are claiming were sold to them as safe and secure bonds. According to a New York Times article, Puerto Rico’s woes stem from the fact that its 3.7 million residents have approximately $87 billion of debt outstanding (about $23,000 of debt for every man, woman, and child) and spiraling pension costs. Further, Puerto Rico has experienced a rapidly declining population and double-digit unemployment causing the debt to be left behind to a smaller and poorer population to shoulder the debt burden.

Bond losses have been so great that Puerto Rico has been effectively shut out of the bond market and is now financing its operations with bank credit and other short-term measures that are unsustainable. The commonwealth’s bonds are widely held by local mutual funds issued by Puerto Rico’s largest brokerage firms including UBS Puerto Rico, Popular Securities, Inc., and Santander Securities, Corp. If the situation continues to worsen some fear that Puerto Rico will need some sort of federal action and bailout, an action without precedent.

Investor loss estimate tied to the bond fund sell-off have reached hundreds of millions of dollars. However, an accurate tally of the total damages is impossible at this time. Some investors have begun filing claims against their brokerage firm claiming that the losses have substantially or completely wiped out their retirement savings. These investors have claimed that their brokerage firm sold the bond funds as safe, stable, income producing investments. However, the bond funds not only had concentrated credit risk in Puerto Rican securities but also, in the case of the UBS leveraged funds, employed leverage of over 53%, exacerbating the losses. Comparatively, municipal bond funds domiciled in the United States are allowed to use only about half as much leverage as employed by the UBS funds.