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Articles Tagged with Banco Popular

UBS Financial Services, Inc. (UBS) and two investors will now arbitrate a Puerto Rico closed-end bond fraud lawsuit accusing the investment arm of the Swiss bank of improperly structuring investments. The plaintiffs, Augusto Schreiner and Nora Fernandez, contend that UBS, its Puerto Rican subsidiaries, firm executives, and Banco Popular de Puerto Rico failed to suitably examine nearly two dozen closed-end mutual funds that held the beleaguered island’s government bonds.

Schreiner and Fernandez were initially part of an attempt to file a class action lawsuit against UBS and its subsidiaries. However, last month, US District Court Judge Sidney H. Stein refused to grant the case class certification status.

The Court found that because all of the plaintiffs had different investment objectives, they would not be able to demonstrate that the mutual funds were unsuitable in general. Judge Stein ruled that it was up to each investor to prove individually, according to their respective needs, objectives, and ability to handle risk, that UBS had neglected to properly analyze the risks that came with the funds.

Four years after Puerto Rico brought to market what became its biggest and final issuance of junk bonds, a 600-page report by disputes and investigative international law firm Kobre & Kim suggests that Banco Popular de Puerto Rico (BPPR) could potentially be held liable for losses related to the issuance. The findings are part of the efforts of the U.S. territory’s Financial Oversight and Management Board to look into what caused the island’s current financial crisis. To date, Puerto Rico remains in over $120 billion in debt as a result of bond issuances and pension liabilities. Thousands of investors continue to file Puerto Rico bond fraud and closed-end bond fund claims to recover their losses sustained when the securities plunged in value in 2013.

According to Kobe & Kim’s findings, while initially both Citigroup (C) and Banco Popular cautioned against yet another junk bond issuance in the wake of the financial challenges Puerto Rico was facing at the time, Banco Popular became part of the syndicate of banks that participated in the $3.5B issuance, profiting in the process. The report indicates, while making clear that the findings are not legal advice, that Banco Popular could potentially be held liable for claim and repayments related to Puerto Rico’s bankruptcy process. Kobe & Kim’s findings are primarily related to a memo that Citigroup and Banco Popular sent to then-Government Development Bank President David Chafey, which included that they did not think the bond issuance was a good idea.

Still, both banks proposed providing instant liquidity backed by taxes in return for the Puerto Rico government approving a balanced budget law, an additional financial control law, and a supervisory group with members appointed by the U.S. Treasury and the Federal Reserve. Citigroup eventually opted not to take part in the bond issuance.

The U.S. Supreme Court struck down a Puerto Rico law that would have let its public utilities restructure $20 billion of debt. The territory’s officials enacted the Recovery Act in 2014 in an attempt to help it deal with its $70 billion of debt. Puerto Rico’s large public utilities owe about $26 billion to bondholders and banks. It was their creditors that challenged the law in federal court.

Puerto Rico is not allowed to file for bankruptcy protection. The Commonwealth is excluded from Chapter 9, which is the section of the bankruptcy code that usually applies to local governments, including cities, public utilities, counties, and other branches that have become insolvent and need help. (Puerto Rico has tried to convince the U.S. congress to get rid of the 1984 rule that excluded it from Chapter 9. No reason has been provided for why it was deliberately left out.)

Writing for the majority in the Supreme Court ruling, Justice Clarence Thomas reminded us that the federal bankruptcy code does not let lower government units and states enact their own bankruptcy laws. However, U.S. legislators are looking for ways to potentially help Puerto Rico.

A bill passed by the U.S. House of Representatives to help the territory deal with its debt crisis has gone to the Senate for consideration. If passed into law, the bill would establish a board to manage the restructuring of Puerto Rico’s debt and oversee the territory’s finances. The Commonwealth sure could use the help.

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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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Hope that the US Treasury will save ailing Puerto Rico bonds does not appear to be warranted. According to a spokesperson for the department, who did not wish to be named, the Treasury will not be providing help to the US territory over the municipal bond fund debacle.

However, reports Fox News, the federal government is expected to provide incentives to enhance Puerto Rico’s failing economy. Right now, Puerto Rico’s debt, which is mostly in mutual funds, is at about $70 billion. That’s close to 2% of the $3.7 trillion municipal bond market. This is significantly higher than Detroit’s $18 billion debt that forced that city to file for municipal bankruptcy earlier this year.

Yet even as Puerto Rico’s debt continues to grow, it won’t be allowed to file for Chapter 9 bankruptcy because like US states, territories cannot seek such protection. That said, officials in Puerto Rico maintain that it isn’t bankrupt yet.

The securities attorneys with Shepherd Smith Edwards & Kantas are investigating claims of investors who purchased Puerto Rico municipal bonds. Many of the largest brokerage firms that operate in Puerto Rico, including UBS, Banco Popular, and Banco Santander, have been selling huge amounts of securities which directly or indirectly were supposed to be investments in Puerto Rico municipal bonds. Those bonds have been viewed as attractive investments by many investors for years as a result of their tax incentives and relatively high yield.

Interest paid by municipal bonds issued by Puerto Rico is exempt from taxation of any type in the United States. This is a significant incentive over municipal bonds issued by United States government entities, which are typically only exempt from Federal income tax, and would still be considered income by state and/or local income taxes. (The exception for the State and local taxes is that most states exempt their own issuances from income taxes, but tax municipal bonds issued by other states.) Additionally, municipal bonds issued by Puerto Rico have, for years, carried relatively high-interest rates. Those high rates, coupled with the preferential tax treatments, have made it easy for brokers to convince their clients, particularly in Puerto Rico, to invest heavily in these securities.

However, even as early as 2009 there were strong indications, as well as publicly available information, that these bonds were in trouble. In 2009, Puerto Rico’s governor declared a state of fiscal emergency. At the time, the territory carried approximately $47 billion in debt and was already bordering on junk-bond/high-risk credit ratings. Yet at the same time, Puerto Rico’s economy shrank by roughly 5.5% in the same year, marking huge challenges for Puerto Rico’s ability to support such a level of debt.

The SSEK Partners Group is investigating claims by investors who bought Puerto Rico municipal bonds from UBS (UBS), Banco Santander (SAN.MC), Banco Popular and other brokerage firms. We are also looking into claims involving other muni funds that have been exposed to Puerto Rico, including the:

• Franklin Double Tax-Free Income A (ticker: FPRTX): 65% of its holdings involve Puerto Rico obligations.

• Oppenheimer Rochester VA Municipal A (ORVAX): 33% of its holdings in Puerto Rico bonds.

As the value of proprietary closed-end bond funds invested created by a UBS AG unit (UBS) in Puerto Rico continue to drop, the financial firm and its 132 financial advisers find themselves facing what is expected to be a protracted legal battle with local investors who want their money back. The value of the Puerto Rico bond funds sank after over $10 billion were sold to investors. UBS is also contending with allegations that a number of its brokers persuaded clients to purchase the bond funds and bonds on a credit line and margin.

The UBS Puerto Rico funds are comprised of 14 close-end funds that were sold through UBS Financial Services Inc. of Puerto Rico’s registered representatives and brokers. As tension over the broader municipal bond market hit the US commonwealth, the net asset value of the funds became eroded, falling from an initial price of $10 to roughly $3 for some of the funds.

Unlike closed-end municipal bond funds domiciled in the US—these are only allowed to have leverage as high as 30% of the assets in the fund—the Puerto Rico bond funds’ leverage can reach as high as 50% of total assets (55%, under certain conditions). Such leverages can only make any losses greater.

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