Puerto Rico Bond Funds

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.

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.

Puerto Rico Paid Wall Street Securities Firms $1.4B in $61B of Bond Sales

Published on: November 23, 2013 | by Shepherd Smith Edwards & Kantas, LLP

As most investors in Puerto Rican bonds are aware, the territory is billions of dollars of debt and the ratings on many of the bonds the Commonwealth has issued have recently fallen. As a result the value of many Puerto Rican municipal bonds has plummeted over the last few months. Still, even with falling ratings and prices and a looming crisis for the Puerto Rican government, Wall Street firms continue to help the territory borrow money.

Reportedly, Puerto Rico and its public agencies have sold $61 billion of bonds in 87 deals since 2006. With these deals the island paid these US securities firms, their attorneys, and others approximately $1.4 billion. Also, the financial firms were able to charge higher underwriting fees for Puerto Rican municipalities than what they imposed on US cities and states when they were in trouble.

According to the Wall Street Journal the territory has paid approximately $764 million in fees to underwriters, credit raters, attorneys, and insurers in the last seven years while backstopping a lot of the bonds. Citigroup (C) and UBS (UBS) received over half this money for underwriting. And just this August, Morgan Stanley (MS) was a lead underwriter when Puerto Rico’s electric power authority sold $673 million in bonds.

Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt

Published on: November 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, hedge funds are starting to bet big on municipal debt by demanding high interest rates in exchange for financing local governments, purchasing troubled municipalities’ debt at cheap prices, and attempting to profit on the growing volatility (in the wake of so many small investors trying to get out because of the threat of defaults). These funds typically invest trillions of dollars for pension plans, rich investors, and college endowments. Now, they are investing in numerous muni bond opportunities, including Puerto Rico debt, Stanford University bond, the sewer debt from Jefferson County, Alabama, and others.

Currently, hedge funds are holding billions of dollars in troubled muni debt. The municipal bond market includes debt put out by charities, colleges, airports, and other entities. (Also, Detroit, Michigan’s current debt problems, which forced the city into bankruptcy, caused prices in the municipal bond market to go down to levels that appealed to hedge funds.)

Hedge fund managers believe their efforts will allow for more frequent trading, greater government disclosures, and transparent bond pricing and that this will only benefit municipal bond investors. That said, hedge fund investors can be problematic for municipalities because not only do they want greater interest rates than did individual investors, but also they are less hesitant to ask for financial discipline and better disclosure.

Why did UBS Financial Advisors Recommend Puerto Rico Muni Bonds to Elderly and Retired Investors?

Published on: November 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of the Puerto Rico Bond Crisis, our securities fraud lawyers cannot help but wonder why advisors of UBS Financial Services of Puerto Rico, Inc. (UBS) recommended that retiree and conservative investors get involved with municipal bonds that had close to junk ratings. Now, many of these investors are coming forward to pursue securities claims against the firm.

According to Forbes, merely assessing Puerto Rico muni bonds via Fitch, Moody’s and Standard & Poor’s should have caused any good financial adviser to make sure that the junk bonds were only recommended to sophisticated clients that could afford the risks. Also, signs that Puerto Rico’s debt was only growing worse have been around for years.

Still, during the last decade, UBS managed to package $10 billion of closed-end bond funds full of risky Puerto Rican bonds that were highly leveraged and sold them to many retired and conservative investors. Now, customers want to know, how could UBS have overlooked the US territory’s unfunded liabilities, serious budget deficits, strict cash flow limitations, and slowed economic growth?

Puerto Rican Labor Groups Want the US Territory to Sue UBS over the Bond Debacle

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

UBS Financial Services, Inc. and its Puerto Rican divisions (UBS) continue to feel the heat in the Puerto Rico Bond crisis, as labor groups in the US territory call on its government to file a bond fraud claim against the bank. They are claiming that the financial firm “tricked” the Puerto Rican government into issuing products that they knew would fail.

Also, lawmakers from the New Progressive Party want the government to investigate UBS’ practices in Puerto Rico. Already Rep. Ricardo Llerandi Cruz is asking for a Capital Inquiry into the firm, while Rep. Ángel Muñoz Suárez announced he would file a bond fraud case with the Securities and Exchange Commission.

Meantime, Carlos Ubiñas, the CEO of UBS Puerto Rico, maintains that the firm is not accountable for “market events.” Issuing a statement, Ubiñas said that the loss in the Puerto Rico bonds’ value has more to do with the market and the lingering questions about the US Commonwealth’s credit.

FINRA Arbitration Panel Issues $1.2M in Awards in Case Against BBVA Securities of Puerto Rico, Inc.

Published on: October 25, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a FINRA arbitration case filed by claimants Felix Bernard-Diaz, Julian Rodriguez and Luz Rodriguez against BBVA Securities of Puerto Rico, Inc., Jorge Bravo, Rafael Colon Ascar, Julio Cayere, and Sonia Marbarak, a Financial Industry Regulatory Authority Panel has awarded $1.2M to the claimants. The Rodriguezes and Felix Bernard-Diaz asserted unsuitable investments, breach of fiduciary duty, gross negligence related to an allegedly unsuitable naked option trading strategy, excessive trading, margin use, and churning.

The respondents denied the accusations and asserted a number of affirmative defenses. They also asked for the CRD files of two of the respondents, Bravo and Marbarak, to be expunged. Last year, respondent Cayere sought bankruptcy protection. The arbitrators did not issue a determination against him.

The FINRA panel said Ascar and BVA were liable, severally and jointly. Now, the respondents must pay Bernard-Diaz $635K in damages and $15K in expenses. The Rodriguezes were awarded $547K in damages and $15K in costs.