Five Facts You Need to Know About the Puerto Rico Bond Problems
Investors in UBS Puerto Rico funds, many of whom have faced losses in excess of 15 percent in 2013, are beginning to ask many questions about the state of the Puerto Rico bond market. Mutual fund managers, including managers of major funds, invested heavily in the tax-advantaged Puerto Rican bonds in recent years, raking in significant fees for underwriting and often failing to disclose to their investors just how heavily they are investing in Puerto Rican debt.
Unfortunately, UBS Puerto Rico bonds are now being rated as extremely risky, leaving many investors in need of key facts about exactly what they have invested in. For investors who are concerned about their risk exposure, here are five facts you need to know.
1) Puerto Rico Has Issued Massive Amounts of Debt
Puerto Rico currently has about $70 billion in outstanding debt and will owe around $2.8 billion of debt within the next year. UBS Puerto Rico bonds have exposure to around $10 billion of Puerto Rico’s debts. Many state-named mutual funds have more than 10 percent exposure to Puerto Rican debt, and many big-name mutual fund companies, including those by OppenheimerFunds, have greater than five percent exposure to Puerto Rican bonds. Investors in UBS Puerto Rico funds, who were often unaware that their fund managers were betting on Puerto Rico, may face significant losses if Puerto Rico is downgraded any further or if Puerto Rico defaults on its bond obligations. Investing in UBS Puerto Rico funds is risky.
2) Puerto Rico has a Very Real Risk of Default
Credit agencies including Standard & Poor (S&P) and Moody’s have downgraded Puerto Rico bond funds and the Puerto Rican bonds are currently rated as high risk. Just a step above junk bonds, Puerto Rican bonds have a negative outlook and yields have climbed above nine percent. Borrowing money to achieve short-term liquidity is getting harder and Puerto Rico’s plan to raise fees and revenue on a population of just 3.6 million people is unlikely to generate the necessary funds, especially when Puerto Rico also boasts an unemployment rate of 13.5 percent. With the current state of Puerto Rico’s economy and debt, some experts have estimated the risk of default as high as 77 percent.
3) Puerto Rico Cannot File for Chapter 9 Bankruptcy Protection
Unlike Detroit, which is also facing huge debts it cannot pay, Puerto Rico cannot file for Chapter 9 municipal bankruptcy because Puerto Rico is treated as a U.S. State. There is talk of a federal bailout, although Washington has indicated that it is simply monitoring the situation. The uncertainty about what will happen if Puerto Rico cannot pay its debts is just one factor accounting for the S&P Puerto Rico bond funds index declining 21 percent in 2013 as of mid-October.
4) About 75 Percent of Muni Funds in the U.S. Hold Puerto Rican Securities
UBS Puerto Rican bond funds have been a popular purchase for fund managers because the bonds enjoy tax-exempt status in all states. Regulations also allow for the purchase of Puerto Rican bonds in state-specific funds, so funds like the Oppenheimer Rochester Virginia Municipal Bond Fund have heavily invested in Puerto Rican debt.
5) The Situation May Worsen for UBS Puerto Rico Funds Investors
Unfortunately, if Puerto Rico defaults on its debt obligations, investors are likely to face even larger losses. Many investors were not informed of the risks of UBS Puerto Rico bonds. Investors are likely to face surprise losses similar to those in the crisis fueled by the sale of subprime mortgage bonds. Investors who face these losses and who were not warned of the risks may have legal rights to recover losses if they were misled by fund managers. However, these investors will need to be vigilant about protecting their rights and trying to recover as much as they can.