Puerto Rico Bond Funds

Puerto Rico Owes $5.4B of Bond Payments

Published on: July 23, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Puerto Rico owes investors $5.4 billion of bond payments in the next 12 months. A lot of this debt is for COFINA, which is sales tax debt, and securities that were sold by the Government Development Bank.

As a result of the upcoming payments and overall debt of the Commonwealth, Puerto Rico Governor Alejandro Garcia Padilla is continuing to press for a restructure of Puerto Rico’s $72 billion debt, which he claims the island cannot pay. Because Puerto Rico has over a dozen kinds of bonds with different security pledges, negotiations over this debt have proved challenging. While some general obligation bonds are protected by the constitution of the commonwealth, others are revenue-backed. Negotiations must move fast as roughly $1 billion is due in January.

This week, PREPA, Puerto Rico’s public power authority, criticized bondholders’ new offer to refinance billions of dollars in debt. The plan was drafted by 40% of the agency’s bondholders, including investors such as BlueMountain Capital and Franklin Advisors. It would divide roughly $8 billion of debt into two tranches.

One tranche would take the form of capital appreciation bonds, which would allow for payments to be deferred for years. Payment for the first tranche, holding about $5.7 billion of debt, would come with debt relief through 2019. Payments on the second tranche, which would hold $2.4 billion, would not have to be completed until 2035.
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OppenheimerFunds Says Puerto Rico Can Repay Its $72B Debt

Published on: July 16, 2015 | by Shepherd Smith Edwards & Kantas, LLP

OppenheimerFunds Inc. (OPY) is disputing Puerto Rico Governor Alejandro García Padilla’s contention that the island cannot pay back its $72 billion debt. The New York-based mutual fund company said that based on data about income growth, sales-tax collection, and unemployment, the U.S. territory’s economy can withstand repaying creditors.

According to Bloomberg data, as of July 9, OppenheimerFunds, which is the largest holder of Puerto Rico municipal bonds, had about $4.4 billion of uninsured obligations from the island. Aside from insured debt, re-refunded securities, and tobacco bonds, these obligations make up 13.8% of Oppenheimer’s municipal fund holdings.

As Puerto Rico bonds continue to lose value-data shows that this year alone Puerto Rico bonds suffered a 9.5% loss-OppenheimerFunds’ municipal funds also have suffered. Bloomberg reports that for 2015,the company’s state funds in Arizona, Virginia, Maryland, New Jersey, and North Carolina, which all hold Puerto Rico securities, sustained the largest losses among single-state, open-end muni funds.

When García Padilla asked for wide-ranging restructuring of the territory’s debt last month, OppenheimerFunds said it would defend the terms of the bonds it holds. The firm does not believe the territory’s fiscal health will get better even if some of Puerto Rico’s agencies file for bankruptcy protection.
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As Puerto Rico Asks Creditors for Concessions, S & P Downgrades the Territory’s Debt and Investors Get Ready for More Losses

Published on: July 1, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Puerto Rico Governor Alejandro García Padilla says that the U.S. territory cannot pay back its $72 billion debt without concessions from its creditors, including U.S. mutual funds and hedge funds. According to the Governor, the Commonwealth’s efforts to restructure its debt and cut spending have failed.

Following the Governor’s announcement, credit rater Standard & Poor’s Ratings Services downgraded Puerto Rico’s credit rating from CCC-plus to CCC-minus. The rating covers the island’s entire debt, including the debt of its Employees Retirement System and the Municipal Finance Agency.

García Padilla and Puerto Rico’s government development bank also issued a report backing his statements. The executive summary was written by Anne Krueger, a former World Bank Chief Economist and the International Monetary Fund’s first deputy managing director, as well as Ranjit Teja and Andrew Wolfe, who are both economists.

In their “Krueger Report,” the economists said that they found the territory’s debt to be unsustainable. Based on the report and Puerto Rico’s own analysis, García Padilla wants to defer debts so that Puerto Rico can continue to negotiate with creditors. Some payments could be deferred for up to five years. The Governor said, “This is not politics, this is math.”
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UBS Must Pay Investor $1M for Puerto Rico Bond Fund Portfolio

Published on: May 20, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority Panel (“FINRA”) has ordered UBS Financial Services Inc. of Puerto Rico and UBS Wealth Management (collectively “UBS”) to pay a client from Puerto Rico $1 million to repurchase the Puerto Rico portfolio of proprietary bond funds sold to him and many other Puerto Rico investors. According to the Panel’s decision, Mr. Burgos Rosado, a senior investor at age 66, lost $737,000 in the beleaguered closed-end funds.

He had opened his account with UBS in 2011 and invested the money he made from running a bodega for years. After Puerto Rico municipal bonds failed in 2013, the original $1.1 million he invested had fallen in value to less than $4,000. Just in September of that year, when news that the bond funds were failing en masse, Burgos Rosado reportedly approached UBS because his balance had dropped some $200,000. He was encourage to stay with his portfolio.

The FINRA panel noted that while investors typically assume their account’s risks after they’ve been given sufficient notice of the risks, the arbitrators did not think this applied in the case of Burgos Rosado, who does not speak fluent English and was clearly relying on the recommendation of his UBS advisor. Even after Burgos Rosado asked for documents in Spanish, the brokerage-firm reportedly issued his monthly statements and other information in English.

UBS Ordered to Pay Retired Investor $200,000 For Puerto Rico Bond Fund Losses

Published on: May 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority (“FINRA”) panel has ordered UBS Financial Services, Inc. and UBS Financial Services of Puerto Rico (collectively “UBS”) to pay an investor $200,000 for losses she sustained by investing in UBS’s Puerto Rico closed-end bond funds. This is the first known ruling from a FINRA arbitration panel in the hundreds of municipal bond fraud lawsuits filed by investors over the last few years.

The investor, Yolanda Bauza, invested money she obtained in a car accident settlement. In her Puerto Rico bond fraud case, Bauza alleged misrepresentations, securities fraud, and other wrongdoing. In addition to the $200,000 award, the arbitrators denied the firm’s request to remove information about the case from the public records of David Lugo and Carlos Gonzalez, two of the brokers who advised Bauza.

According to Sam Edwards, a partner with Shepherd, Smith, Edwards & Kantas, who is representing a number of Puerto Rico bond fund investors, “We are very pleased that FINRA’s arbitrators recognized what those of us representing the many thousands of investors in Puerto Rico and abroad have known for almost two years: UBS’s Puerto Rico bond funds were highly conflicted, very risky and completely misrepresented to investors. They were suitable for almost no investors. As a result, those who invested in these bond funds, like Ms. Bauza, should be fairly compensated.”

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.

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.