Puerto Rico Bond Funds

Investors Pursue UBS’s Puerto Rico Brokerage Over Closed-End Bond Funds

Published on: July 23, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is reporting that roughly 400 claims have already been filed against UBS Financial Services Inc. of Puerto Rico (UBS) and other brokerage firms over the fallout of municipal bonds and bond funds related to the Commonwealth of Puerto Rico. As the U.S. territory’s bonds continue to drop in price, more investors are likely to file cases.

According to Securities Attorney Sam Edwards, one of the partners at Shepherd, Smith, Edwards & Kantas currently representing dozens of investors who lost money in these investments, “”The recent drop in Puerto Rico bond prices have resulted in Puerto Rico bonds, and the bond funds holding Puerto Rico bonds, to give back most, if not all, of the gains of the last nine months. Bond prices have largely returned to the lows suffered in the Fall of 2013.” Mr. Edwards continues, “This is likely to result in new groups of clients coming forward as the rally in Puerto Rico debt appears to have been short-lived.”

Investors, many of them locals, took huge financial losses when two dozen Puerto Rico bond funds sponsored by UBS and Popular Securities, Inc. (Banco Popular) declined in value last year. Many of the investors are retirees and other senior investors that have now lost their life savings. However, they are not the only ones impacted.

OppenheimerFunds, Franklin Templeton Sue Over Puerto Rican Debt Law

Published on: July 2, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Investment firms OppenheimerFunds Inc. and Franklin Templeton (BEN) have filed a lawsuit claiming that Puerto Rico’s new law, which lets certain government agencies restructure their debt, violates the constitution. Lawmakers in Puerto Rico approved the bill last month.

Aside from its power agencies, the entities that would be allowed to restructure the debt under the new law include Puerto Rico’s water and transportation agencies. Collectively, all of the agencies have about $19.4 billion in outstanding bonds. The Act does not have provisions for restructuring tax-backed bonds and general-obligation bonds.

The two fund managers together hold about $1.7 billion in Puerto Rico Electric Power Authority debt. They want the legislation, known as the Public Corporations Debt Enforcement and Recovery Act, blocked.

UBS AG Under Criminal Investigation Over Puerto Rico Bond Fund Sales

Published on: June 21, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Authorities in the United States are reportedly investigating UBS AG (UBSN) for its actions in Puerto Rico. The criminal fraud investigation comes in the wake of allegations that an ex-UBS broker in Puerto Rico told clients to improperly borrow money to purchase local mutual funds that later sank.

The investigation is centered around non-purpose loans that came from UBS Bank USA of Utah. The former UBS broker, Jose Ramirez, organized the loans for clients. The bank has since let him go.

Under internal guidelines, such loans are not allowed to be used for the purchase of securities since those very securities will be the collateral for the loans. Now, however, investors are saying that Ramirez was utilizing these loans to purchase more shares in the bond funds for them. Some are even saying that he gave them paperwork that made it appear as if customers were borrowing from the UBS bank in Puerto Rico and not the one in Utah. More than 100 investors may have been affected.

Puerto Rico-Based Doral Financial Expected to Default on Over $150M in Muni Bonds

Published on: May 12, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Moody’s Investors Service (MCO) and other credit rating agencies are saying that there is a good chance that Doral Financial Corp. (DRL), which is based in Puerto Rico, will default on over $150M muni notes and bonds. Moody’s has downgraded both a note and a bond that was issued by the Puerto Rico Conservation Trust Fund, in which Doral Financial Corp. is the obligor, from Caa3 to C. This is the lowest rating the agency can give before an investment defaults. This prediction comes after regulators determined that receivables from Puerto Rico’s government couldn’t be included in Doral Financial’s Tier 1 capital.

The receivables were $289M out of Doral’s $679M of Tier 1 capital. The regulators’ decision will compel the bank to up its capital or turn in a contingency plan to liquidate, merge, or sell. The plan has to be submitted to the Federal Deposit Insurance Company (“FDIC”).

Moody’s also downgraded senior secured bonds from Doral Properties, a Doral Financial subsidiary, from Caa3 to C, while Fitch Ratings lowered Doral Financial’s issuer default rating from CCC to C (the credit agency’s second lowest possible rating). Standard & Poor downgraded the bank to CC, which is its third lowest rating.

FINRA Sees 10% Rise in Arbitration Cases, Puerto Rico Bond Claims A Factor

Published on: April 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to statistics put together by the Financial Industry Regulatory Authority, the number of securities arbitration cases brought by the self-regulatory agency is on target to exceed last year’s total. A likely contributor to the increase can be attributed to the numerous Puerto Rico municipal bond cases already filed by investors who sustained huge losses. More of these are inevitable, especially as FINRA just increased its arbitrator pool to deal with cases involving muni bonds from the US territory.

The broker-dealer regulator said that during this first quarter alone, 1,011 FINRA arbitration cases were submitted-a definite increase from the 919 securities arbitration claims filed during 2013’s first three months. However, the number of arbitration cases that were closed during this first quarter is less than in two years prior, with just 946 resolved. Compare that to the over 4,400 and 4,800 cases in 2013 and 2012, respectively.

That said, 5O% of arbitration cases decided during this initial quarter rendered damage awards, which is more than in the last two years. The most common claim in FINRA arbitration cases filed in 2014 so far is breach of fiduciary duty. Negligence, failure to supervise, and breach of contract are the other leading claims.

Large Hedge Funds Invested in Puerto Rico Bonds

Published on: April 11, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, a number of large hedge funds and other nontraditional buyers got involved in Puerto Rico debt last month during the US Territory’s $3.5B bond sale, buying up to 70% of the deal. Brigade Capital Management, Och-Ziff Capital Management (OZM) LLC, Perry Capital LLC, Paulson & Co., and Fir Tree Partners were among those to purchase over $100M of the bonds. Black Rock Inc. (BLK), which is also a hedge fund, bought in as well. However, the list doesn’t indicate whether the firms still hold the bonds or if they have sold them since. (The Municipal Securities Rulemaking says that investors originally holding the bonds have already sold about $1.7 billion of the bond since it was issued.)

Some of the other buyers that bought into the Puerto Rico bond sale in March were Harvard University, OppenheimerFunds (OPY), a unit of Gannet Co., and a number of banks, insurers, and retail investors. (Also, many investors may not be aware of this but as of the end of last year, David Lerner Associates, the privately held broker-dealer that was the exclusive distributor of the troubled Apple non-traded REITs had invested in a big way in Puerto Rico debt via its Spirit of America Hi Yield Fund.)

Since the bond sale, underwritten by Morgan Stanley (MS), Barclays (BARC), and RBC Capital Markets (RBC), the prices of Puerto Rico bonds have dropped. Prior to the sale the major credit rating agencies had downgraded the bonds to junk status, and many investors who bought into Puerto Rico municipal bonds through firms such as UBS (UBS), Banco Santander (SAN), Banco Popular, and other brokerage firms, were already filing securities fraud claims over their investment losses.

Puerto Rico Bonds Are at Record Low Prices After FINRA Announces It Is Looking At Transactions

Published on: March 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg, Puerto Rico bonds that were issued this month are now at record low prices after the Financial Industry Regulatory Authority announced that it is looking at transactions involving the new securities. The US territory sold $3.5 billion of general obligation bonds, which is the largest junk bond offering in the history of the municipal market.

According to numerous financial news sources, the offering documents for Puerto Rico’s newly issued bonds stated there would be a $100,000 minimum order allowed so that the purchasers of the junk bonds would be limited largely to institutional buyers. Their prospectus says that bonds were to be issued at a $100,000 minimum and “integral multiples of $500,000 in excess thereof” unless Standard & Poor’s, Moody’s Investors Services, and Fitch Ratings raise Puerto Rico’s credit to investment grade. All three credit ratings agencies recently declared the US territory’s credit ratings “junk.”

Nevertheless, many transactions under the $100,000 amount have been reported, despite the lack of an upgrade in the bonds. As a result, scores of Puerto Rico bond transactions issued this month were cancelled. There is also data indicating that some brokers are trading under the $1,000 minimum established by the prospectus.

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).