Municipal Bonds

Muni Bond Investors Pay Twice More In Commissions than When Investing in Corporate Bonds, Reports The Journal

Published on: March 10, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to a study for The Wall Street Journal, investors in municipal bonds are paying trading commissions that are around twice as high as those for corporate bonds. Individuals continue to be the largest participants in the muni bond industry, currently valued at $3.7 trillion, because these bonds are considered pretty safe and have interest payments that are not taxed.

The municipal bond industry offers funding to cities, states, school districts, and hospitals. While regulators have largely overlooked municipal debt in the last two decades, lately they are scrutinizing these securities more closely. That said, unlike corporate bond and stock brokers, who are obligated to reveal market price and provide “best execution” on trades to individuals to make sure they get the best prices, brokers in the muni bond industry aren’t held to the same duties, making it easier for them to buy bonds at low prices and sell them at high ones.

This can leave many investors vulnerable to fees and pricing that they should be protected from. For example, The Journal cites an example of one Massachusetts man who sold bonds promising a 5% yearly interest from his home state in two lots at $100K each in July 2013. The next day, he sold the same amount of bonds to investor at $1060/bond—making about $112,000. Municipal Securities Rulemaking Board records show that for that month, brokers in Massachusetts sold $1 million in state bonds to investors with a 3% average markup than what they actually paid—that’s a $30,000 profit.

Puerto Rico Senate Votes to Sell $3.5B in Bonds

Published on: February 28, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Senate for the Commonwealth of Puerto Rico has approved a bill authorizing the sale of at least $3 billion in bonds. The legislation is geared toward assisting the US territory from defaulting on its $70 billion of debt and boost the Government Development Bank’s liquidity. Wall Street investment banks Morgan Stanley (MS), Barclays (BCS), and RBC Capital Markets are going to handle the bond sale, which is expected to happen in March.

Among the issues that still must be resolved is where, if the Commonwealth defaults on the new issuance, the US Territory can be sued. Currently, Puerto Rico has sovereign immunity and therefore can only be sued in Puerto Rico under its own laws. However, US investors who will be needed for the sale to complete want the Commonwealth to agree to waive sovereign immunity and instead agree to be sued in New York courts if there is any dispute.

Since August of last year, Puerto Rico bonds have suffered significant losses. Recently, all three major ratings agencies downgraded Puerto Rico’s general obligation bonds, along with many other Puerto Rican issuances, to “junk” status. Many investors in the United States and in the Commonwealth have lost significant money on their Puerto Rico municipal bonds that were sold to them by UBS (UBS), Banco Santander (SAN), Banco Popular, and other brokerage firms.

Hedge Funds Interested in Upcoming Puerto Rico Bond Offering Want The Territory to Borrow Money To Last Two Years

Published on: February 17, 2014 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of Puerto Rico’s plans to sell $2 billion of general-obligation debt to try to balance its beleaguered budget, the hedge funds planning to get involved in this latest bond offering are asking the US territory to raise enough funds to last two years. Reportedly, the hedge funds also want the Commonwealth to surrender its sovereign immunity, which would let bondholders sue in New York court instead of dealing with the Puerto Rican judicial system.

The reported hedge funds’ requests point to the awareness that risks involving Puerto Rico have gone up. Just this month, Moody’s Investors Service, Fitch Ratings, and Standard and Poor’s all downgraded the U.S. territory to junk status. Aside from the planned Puerto Rico bond offering, which is being underwritten by Morgan Stanley (MS), Barclays Plc (BCS), and RBC Capital Markets (RBC), legislation is in the works to give the Commonwealth up to $3.5 billion of borrowing capacity.

As of the end of June, the US territory and its agencies had outstanding debt of roughly $70 billion. The downgrades by the credit rating agencies led to $940 million of accelerated payments on swap fees and debt, with close to half due in 30 days.

OppenheimerFunds Increases Its Exposure to Puerto Rico Debt Despite Downgrade by Moody’s, S & P, and Fitch to Junk Status

Published on: February 14, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Even though Puerto Rico’s debt has been downgraded to “junk” status by the three major ratings agencies (Standard & Poor’s, Moody’s, and Fitch Ratings), OppenheimerFunds (OPY) has increased its holding of Puerto Rican debt in two of its municipal bond funds that carry lower risk. The credit raters downgraded the US Commonwealth over worries about its failing economy and decreased ability to finance its deficits in capital markets.

According to Reuters, Lipper Inc. says that at the end of last year, the Oppenheimer Rochester Short-Term Municipal Fund’s (ORSCX) exposure to Puerto Rico’s debt had risen 13% from a year ago, while its Intermediate-Term Municipal Fund more than doubled its exposure to 17%. (Details of the holdings in both funds since then are still unavailable.) Both have a 5% limit on how much junk-rated debt they can contain. However, because the US territory’s debt was downgraded after the buys were made, Oppenheimer, which is part of MassMutual Financial Group, may not obligated to unload the assets.

The company has continued to support Puerto Rico municipal bonds, even as a lot of other mutual fund firms have lowered their exposure to Puerto Rico debt. This week, Oppenheimer downplayed the investment risk involved, noting that most bonds involved are insured (Reuters reports that 27% of the holdings in the intermediate-fund and another 4% in the short-term fund, do not have insurance).

Standard and Poor’s Reduces Puerto Rico Obligation Debt to Junk Status

Published on: February 6, 2014 | by Shepherd Smith Edwards & Kantas, LLP

This week, Standard & Poor’s (“S&P”) cut the credit rating for Puerto Rico’s general obligation debt to junk-bond status due to concerns about an inability to access capital markets. S&P had put the US territory’s rating on notice for such a downgrade late last year. Now, the credit rating agency announced, it is officially issuing that downgrade to a “BB”-a level under investment grade.

The credit rating agency believes that the Caribbean island’s ability to sell additional debt in $3.7 trillion municipal bond market is limited and cash shortages could happen. Because of such “liquidity constraints,” S & P does not feel that an investment-grade rating is warranted. The agency also cut its rating on Puerto Rico’s Government Development Bank to a BB, as well.

Puerto Rico has been in peril of getting a ratings downgrade by all three US credit raters for some time now in part because of its $70 billion of tax-free debt. Responding to the junk status downgrade, Puerto Rico’s Treasury Secretary and Government Development Bank said that S & P’s decision was a disappointment but they remained “confident” that the US territory had enough liquidity to meet such needs through the fiscal year’s conclusion.

Billions of Dollars Have Already Been Lost by Investors in Puerto Rico Closed-End Funds that were Sold by UBS

Published on: January 10, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to new research from a consulting group, the losses of investors who purchased UBS Puerto Rico closed-end municipal bond funds is now in the billions of dollars. During the first nine months of 2013 alone, reports InvestmentNews.com, 19 of UBS’s Puerto Rico closed-end funds lost $1.6 billion. The ones that lost the most were reportedly the funds with big muni bond holdings that were underwritten by UBS.

UBS Financial Services, Inc.’s Puerto Rico unit put together and sold roughly $10 billion in closed-end bond funds between 2002 and 2012. As the funds were only registered to be sold in Puerto Rico, they were largely composed of Puerto Rico municipal bonds and could be sold only to Puerto Rican residents, who have now been hit with huge losses as the value of Puerto Rican debt has fallen sharply over the last few months.

In addition to UBS’s bond funds, other bond funds that have purchased Puerto Rican debt and investors holding individual Puerto Rican bonds in the US have been significantly impacted. In fact, if Puerto Rico were to default on its debt, the impact would be far reaching. According to Forbes.com, a default in Puerto Rico would change the price of the whole $3.7 trillion US municipal bond market, which could cost municipalities and states in the US billions of dollars in interest rate charges. Already, investors on the mainland found themselves paying close to $10 billion last year because Puerto Rico’s $52 billion in bonds were down 20% on average.

UBS Bank USA No Longer to Offer Loans Collateralized with Puerto Rico Securities

Published on: December 28, 2013 | by Shepherd Smith Edwards & Kantas, LLP

UBS Bank USA, the Utah affiliate of UBS AG (UBS), will no longer be granting or offering loans collateralized by Puerto Rico securities. According to the media outlet El Nuevo Dia, UBS Bank USA has agreed to sell approximately $562 million in loans made to Puerto Rican investors to another UBS AG affiliate, UBS Financial Services of Puerto Rico (UBS PR). Additionally, UBS Bank USA has agreed to no longer offer loans to Puerto Rican residents.

As reported, UBS Bank USA signed an agreement with the Office of the Commissioner of Financial Institutions after an investigation was opened concerning the ability of UBS Bank USA to have issued such loans. Per the agreement, the loans transfer was to be completed by around December 20, while the new lending ban in Puerto Rico would go into effect after that date.

Thousands of investors have lost some if not all of their assets in the wake of the drop in value of Puerto Rico bonds and closed-end bond funds that invested in Puerto Rico bonds. This spurred UBS to liquidate millions of dollars from investors because the values guaranteed borrowings with UBS Bank USA. (UBS Bank USA had previously told El Nuevo Dia that it did not have to be licensed in Puerto Rico to lend there.)

Moody’s Reassessment of Puerto Rico Bonds Does Nothing to Relieve Investor Worries

Published on: December 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

One day after Moody’s Investor Service placed Puerto Rico’s general obligation bonds rating of Baa3 on review for downgrade to junk status, the credit rating agency affirmed the ratings it had earlier in the year given four banks: Banco Santander Puerto Rico, Popular Inc. and its subsidiaries, FirstBank Puerto Rico, and Doral Financial Corporation, as well as the ratings for senior bonds put out by Doral Financial and Banco Santander Puerto Rico through the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority. The ratings outlook for First Bank, Popular, and Doral Financial stayed negative, as did Banco Santander Puerto Rico’s BFSR/BCA. (However, the outlook on that bank’s supported deposit and debt ratings are stable due to the bank’s affiliation with Santander Bank NA, which is a US affiliate.)

Puerto Rico, which is a major municipal bond issuer, has been close to or in recession for nearly a decade and has over $70 billion in debt. Moody’s said it is worried about the territory’s growing dependence on outside short-term debt, “weakening liquidity,” limited market access, and its poor economy. The credit rater believes that the fiscal and economic challenges that the territory continues to face will keep threatening the “health of the banking system.” Noting that the banks’ non-performing assets continue to remain negative relative to banks in the US mainland, the agency said that this could result in more losses if things don’t get better.

Unfortunately, many investors who got involved in Puerto Rico muni bonds were not apprised of the risks or could have never handled the high risks to begin with. Some investors have lost their retirement or life savings as a result.

Three Ex-GE Bankers Convicted of Municipal Bond Bid Rigging Are Set Free

Published on: December 12, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a 2-1 ruling, the U.S. Circuit Court of Appeals in New York panel has decided that three ex-General Electric Co. bankers charged with conspiring to bilk cities in a muni bond bid rigging scam can go free because the US government waited too long to prosecute them. Reversing last year’s convictions of Dominick Carollo, Steven Goldberg, and Peter Grimm, the court dismissed the criminal case against them and ordered that they be released from prison.

According to prosecutors, the three men worked with guaranteed investment contracts that allowed municipalities to make interest on money made from bond sales until they wanted to spend on local projects. The government believes that between August 1999 and May 2004 Carollo, Goldberg, and Grimm gave three brokers, including UBS PaineWebber, kickbacks to win actions for the contracts even if it meant the bank would make interest payments that were artificially low.

A federal jury convicted the former GE bankers of defrauding the country and conspiracy to commit wire fraud. They appealed, appealed, contending that the indictment on July 27, 2010 exceeded the statute of limitations, which is six years for conspiracy to bilk the US via tax law violations and five years for conspiracy. The government disagreed, arguing that the limitations’ statute went on as long as GE was paying rates that were not competitive.

Puerto Rico Reportedly Among Those that Engaged in “Scoop & Toss” Tactic with Municipal Bonds

Published on: December 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, Puerto Rico has been engaging in a budget-stretching maneuver, known as the “scoop & toss” for some time now. The tactic, which has been employed by financially strapped local governments, including states, municipalities and other entities for years, is now under closer examination.

Scoop and toss consists of selling new long-term debt to raise money to pay off bonds that are maturing. This lengthens the timetable for municipal bonds that are retiring. Such debt sales frequently provide interest rates that are above market. Many bond buyers can find this attractive, especially when the economy is growing slowly and rates on other bonds are low.

Now, however, observers are cautioning that refinancings using the scoop and toss approach is increasing interest costs and letting civic managers ignore structural economic problems. Meantime, the debt buyers end up taking on the risk that the securities could lose their worth. Critics of the scoop and toss describe it as a short-term solution and not a permanent one.