Municipal Bonds

Puerto Rico’s General Obligation Rating is Downgraded to CCC+

Published on: April 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Standard & Poor’s (“S&P”) has just downgraded the general obligation rating of Puerto Rico from a rating of B to a rating of CCC +. The ratings agency said the downgrade was because the market access prospects for the U.S. territory have weakened even further and Puerto Rico’s ability to fulfill its financial commitments is becoming more and more linked to the economic and business conditions in the Commonwealth, which are not strong.

The credit rater is also putting the general obligation rating on CreditWatch negative, which means the rating could go even lower into junk bond status and closer to a default. S&P lowered its ratings on the first-lien and second-lien sales tax bonds of the Puerto Rico Sales Tax Financing Corp. from B to CCC + as well. The bonds of the Puerto Rico Employees Retirement System and the Puerto Rico Municipal Finance Agency also received downgrades with a negative outlook.

S&P says that unless the conditions in Puerto Rico get better, the territory won’t be able to sustain its financial commitments. The ratings agency said there was not currently a consensus on key aspects of the 2016 budget and that this could make fiscal pressure and liquidity worse. In a letter from Puerto Rico’s Government Development Bank to its governor, there were concerns about liquidity problems unless the government starts tax reform and enacts a budget. S&P stated that if the budget is delayed or flawed there might be an even further ratings downgrades.

Puerto Rico, Hedge Funds Look to Ex-IMF Officials to Help With Debt Crisis

Published on: April 25, 2015 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, the government of Puerto Rico and the hedge funds that own its bonds are looking to ex-International Monetary Fund officials to help solve the U.S. territory’s growing debt problem. Meantime, Puerto Rico is talking to the funds and other investors about borrowing some $3 billion in new bonds to help fill its coffers that are almost empty. Already, the commonwealth is in debt of over $70 billion.

Now, say sources, Puerto Rico has retained ex-IMF first deputy managing director Anne Krueger as a consultant, and a committee for the hedge funds is talking to the IMF’s ex-Western Hemisphere department director Claudio Loser. The IMF is considered the lender of last resort for countries that are considered emerging market nations.

The dealings with ex-IMF heads are an indicator of Puerto Rico’s unusual status. It is not a sovereign nation or a U.S. state. Therefore, its municipal entities are not entitled to the U.S.’s bankruptcy protections. Yet because the island is an American commonwealth, it doesn’t qualify for aid from the IMF.

Former UBS Puerto Rico Executives File a $10M FINRA Arbitration Claim Against the Firm

Published on: April 15, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Siblings Teresa and George Bravo, who formerly worked as financial advisors at UBS Financial Services Inc. of Puerto Rico (UBS-PR), have filed a $10 million Financial Industry Regulatory Authority (FINRA) arbitration claim against the firm. The Bravos, both were senior vice presidents at the broker-dealer, claim that management deceived not just customers but also employees about proprietary closed mutual funds.

The Bravos said that they thought working with UBS would help them be of better service to their clients, which is why they left their old firm. However, the allegedly fraudulent conduct taking place at UBS created material conflicts of interest for them and other employees. The Bravos are contending that during the three years they worked at UBS, they were repeatedly deceived, mistreated, threatened, and coerced before being forced out.

They collectively managed over $120 million in client assets while working for UBS. According to their complaint, the Bravos said that UBS created a high-pressure atmosphere to get brokers to find and sell more of UBS’s proprietary closed-end mutual funds or risk termination otherwise. Teresa Bravo says that she was even duped into buying $100,000 in mutual funds herself. She and her brother are accusing UBS of deceiving customers for its own protection and trying to artificially preserve the Puerto Rican closed-end funds market.

U.S.’s $1B Mortgage Bond Trial Against Nomura Holdings Comes to a Close

Published on: April 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Closing arguments took place this week in the Federal Housing Finance Agency’s mortgage-backed securities lawsuit against Nomura Holdings Inc. (NMR). The U.S. regulator claims that the bank made false statements when selling some $2 billion in MBSs to Freddie Mac (FMCC) and Fannie Mae (FNMA).

A lawyer for the bank said that FHFA’s claimed losses were not the fault of Nomura or that of Royal Bank of Scotland (RBS), which the government is also pursuing over the securities. Instead, contended the attorney, market conditions during the 2008 economic crisis were to blame.

The is the first of 18 MBS fraud cases over about $200 million in securities that different banks sold to mortgage finance giants to go to trial. Already, FHFA has gotten $17.9 billion in settlements with the other financial firms, including JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), and Deutsche Bank AG (DB). There was just this case and the one against Royal Bank of Scotland remaining.

Puerto Rico’s Debt Gets Downgraded to “B” by Fitch Ratings

Published on: March 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Credit rating agency Fitch Ratings (“Fitch”) has downgraded the general obligation and related debt of Puerto Rico to “B”, rating it even further into junk territory and three notches under investment grade, because of worries about the U.S. territory’s ability to go through with planned financing. As a result of the downgrade of the general obligation debt, the Puerto Rico Aqueduct and Sewer Authority senior lien revenue bonds were also downgraded.

The ratings reduction is related to a new law in the Commonwealth. The law is supposed to help overhaul public debt by letting certain government agencies with a reported $19.4 billion in outstanding bonds restructure their debt. Fitch is worried that because of the way the restructuring is delineated in the law, this could result in debt payment suspensions while “precluding timely payments” of principal plus interest until proceedings are finalized.

Fitch also reduced the rating of Puerto Rico’s sales tax entity COFINA, pension funding bonds, and the Public Building Authority government facilities’ revenue bonds. The credit rating agency pointed to mixed economic signs, such as accelerated year-over-year declines in the labor force and yearly drops in the monthly economic activity index of the Government Development Bank, as the reason for the new downgrades. Recently, Standard & Poor’s also reduced the general obligation debt of Puerto Rico to junk bond status- a BB, which is right below investment grade.

Doral Bank In Puerto Rico Fails

Published on: March 5, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Deposit Insurance Corp. announced that The Office of the Commissioner of Financial Institutions of Puerto Rico has shut down Doral Bank in San Juan. The FDIC is now the bank’s receiver. Many investors have lost money through the Puerto Rico Conservation Trust Fund.

Banco Popular de Puerto Rico has now purchased $3.25 billion of Doral’s assets to acquire the defunct bank’s operations, including its deposits. A day after Doral shuttered its doors, 26 of its former branches reopened. Eight of them are now run by Banco Popular (OTCMKTS: BPESY), which resold the other 18 branches and their deposits to FirstBank Puerto Rico, Banco Popular North America, and Centennial Bank. The latter two now run Doral’s U.S. branches.

Doral Bank had approximately $5.9 billion in overall assets and $4.1 billion in deposits ending in 2014. Regulators determined that it was “critically under-capitalized.” After the FDIC notified the bank that it wouldn’t be able to use a $229 million tax refund for its Tier 1 capital, it was unable to raise more capital.

UBS Financial Puerto Rico’s Chairman Told Brokers to Sell More Bond Funds in 2011

Published on: February 7, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Reuters is reporting that in 2011, before the prices of UBS Financial Services Inc. of Puerto Rico’s (UBS) proprietary bond funds dropped, the firm’s chairman, Miguel Ferrer, told brokers to either start selling more UBS Puerto Rico bond funds or find a new job. He spoke after the brokerage firm’s representatives began to express reservations about selling the bond funds to their customers because of, among other issues, the high risks that were involved.

According to Reuters, sources in the know said that when UBS asked their brokers about their reluctance to sell the funds, they gave Mr. Ferrer and UBS nearly two dozen reasons, including concerns with low liquidity, excessive leverage, instability, oversupply, and because of the concentration of Puerto Rican government debt, which UBS had underwritten.

UBS has come under fire not just for pushing its own funds to clients for whom they were not appropriate, but also for improperly directing some of them to borrow money from another UBS unit to purchase more fund shares. The Federal Bureau of Investigation, along with the Securities and Exchange Commission, are reportedly looking into the allegations.

DOJ Gets Ready to Wrap Mortgage Bond Case Against Standard & Poor’s, Probes Moody’s

Published on: January 31, 2015 | by Shepherd Smith Edwards & Kantas, LLP

According to the Wall Street Journal, the U.S. Department of Justice has been meeting with ex-Moody’s Investor Service (MCO) executives to talk about the way the credit ratings agency rated complex securities prior to the 2008 financial crisis. Sources say that the probe is still in its early stages and it is not certain at the moment whether the government will end up filing a bond case against the credit rater.

DOJ officials are trying to find out whether the company compromised its standards in order to garner business. The government’s focus is on residential mortgage deals that took place between 2004 and 2007.

Moody’s and credit rating agency Standard and Poor’s gave triple A ratings to the deals so that even conservative investors were buying the subprime loan-backed securities. The investments later proved high risk. When the housing market failed, the bond losses cost investors billions of dollars.

Ambac Files Mortgage Bond Lawsuit Against Bank of America

Published on: January 7, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Ambac Assurance filed a mortgage bond lawsuit against Bank of America (BAC) for what it claims were losses of hundreds of millions of dollars from insuring over $1.6B of securities. The holding company says that the loans were at least partially backed by high-risk mortgages from the bank’s Countrywide Home Loans unit.

According to the mortgage bond lawsuit, Ambac contends that Countrywide lied about the quality of its underwriting of loans that were backing the securities, which were issued in several transactions over a two-year period prior to the acquisition of the unit by Bank of America in 2008. The holding company said that it could be facing potential claims greater than $600 million. It claims that the loan pools backing the certificates it insured have lost billions of dollars. Ambac said that if it had known Countrywide lied it would have never guaranteed payments.

This is not the first time that Ambac has sued Bank of America Corp. In 2010, the company filed a $16.7 billion mortgage-backed securities case against the bank. In that securities case, Ambac claimed that Countrywide fraudulently persuaded Ambac to insure bonds with loans that were not properly made.

Beneficiaries of Puerto Rico Trust File Securities Fraud Lawsuit Seeking Over $4.5M From UBS Financial Services

Published on: January 5, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Plaintiffs in Puerto Rico who say they are the beneficiaries of a trust have filed a securities lawsuit against UBS Financial Services (UBS). The beneficiaries’ complaint asserts that UBS in Puerto Rico breached its duty to properly manage funds linked to UBS’s proprietary closed-end Puerto Rico bond funds.

The beneficiaries of Nellie Sánchez Carmona’s estate claim that the brokerage firm acted against their best interests when it opted to keep the trust invested in the proprietary funds-a move that earned UBS underwriting and management fees, along with commissions, and interest. The beneficiaries contend that UBS and its subsidiaries purposely prevented Sánchez Carmona from collecting benefits she was owed so that the firm could keep investing her money in the closed-end funds, which were issued by the firm, and continue to collect fees.

Also, according to the plaintiffs, for 10 years UBS prevented Sánchez Carmona from finding out that she was a beneficiary of the trust, which was set up by her husband Robert Hargen. Even though he passed away several years ago, UBS, in federal filings up to at least 2010, represented that Hargen was still alive and in possession of the trust.