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UBS Puerto Rico Funds Lead to An Important Question: How Much Debt Does Puerto Rico Have?

Posted: Nov 12, 2013 | Posted in:

When bonds are issued from U.S. cities and territories, investors have an expectation that those bonds are reasonably safe and that the debt will be paid. Unfortunately, this expectation may not hold true for bonds issued by Puerto Rico.  Puerto Rico is facing massive debt problems and, tragically, many investors in UBS Puerto Rico funds who trusted their mutual fund managers to make smart purchases may be exposed to significant losses if there is a default.

Investors who have faced losses exceeding 15 percent this year because their mutual funds were heavily invested in Puerto Rico bond funds may be learning for the first time how UBS Puerto Rico funds managers managed their investments. These people may be discovering that their money is at risk.  Many of these investors are now questioning the amount of debt Puerto Rico actually has and whether Puerto Rico will default on the debt.

Puerto Rico’s Outstanding Debt

Puerto Rico currently has more than $70 billion in outstanding debt.  More than 600 municipal bonds have been issued by Puerto Rico, and within the next year alone, Puerto Rico will be required to pay back $2.8 billion.

Unfortunately, there is serious concern about whether Puerto Rico can pay back all the money owed, or even a significant portion of it.  Puerto Rico has a small population of 3.6 million people and yet its debt balance is greater than any state in the United States except California and New York, which have populations of 38 million and 20 million respectively.  Puerto Rico also has a labor force participation rate of just 41 percent, while the labor force participation rate throughout the U.S. is 63 percent.  Moreover, one worker out of every five in Puerto Rico is employed by the government.

Puerto Rico’s tiny population and small number of private sector workers mean that it may have significant problems generating enough funds to repay $2.8 billion over the next year.  Puerto Rico’s cash flow has been negative for the past 13 years, and the territory has not yet filed its 2012 Comprehensive Annual Financial Statement.  The ratio of debt to personal income in Puerto Rico is a shocking 89 percent, while in the U.S. this ratio averages just 3.4 percent.  This leaves the people of Puerto Rico on the hook for a massive amount of debt. The Puerto Rican government’s current plan is to significantly raise taxes and fees to generate the necessary funds.

UBS Puerto Rico funds will be hit hard if Puerto Rico is not able to pull off the massive feat of raising billions of dollars during the next few years.  Of the $70 billion in debt Puerto Rico owes, UBS Puerto Rico funds have exposure of about $10 billion.  If Puerto Rico faces a downgrade of its general credit rating and if Puerto Rico bonds are downgraded further (they are already near-junk status), investors with money in UBS Puerto Rico funds will face losses even greater than they have already experienced.

These investors can seek to take action against the financial managers and brokers who misled them. Legal action may be the only option to avoid losing more money from these investments that many investors thought were relatively safe.