The fallout of holding concentrated Puerto Rican bond investments is becoming widely known across the small Caribbean island. Investors are lining up to bring UBS Puerto Rico to task because of the poor advice following the mark down by Standard & Poor’s (S&P) and Moody’s to speculative or “junk” status earlier this month,
“As the effects of Puerto Rico’s recent downgrade become more widely known, investors will come to realize the extent of their exposure,” commented Peter Mougey, a partner with the Levin, Papantonio law firm and director of the firm’s Securities & Business Litigation department. “Recommending UBS Puerto Rico’s close-ended bonds and municipal bonds in large concentrations does not adhere to industry standards or FINRA Regulations,” says Mougey.
Losses from the Puerto Rican bond flop are estimated to be in the billions of dollars so far. Concerns mounted considerably over the past few years as the island territory’s government faces trouble meeting its debt obligations. Recently-elected officials have had to enact pension reforms and tax increases in an attempt to combat potentially not paying the territory’s bills.
These concerns ultimately resulted in Puerto Rico’s credit rating downgrade. “Of course, ratings downgrades are typical after the losses already occurred and highlights why the standard in the securities industry is to diversify investors’ holdings.” says Mougey.
The SEC has previously filed suit against UBS regarding conditions in Puerto Rico. In those suits, the SEC alleged that UBS was fully aware of a “supply and demand imbalance” and that internally the company discussed facing a “weak secondary market” but continued to peddle its products to investors. UBS settled with the SEC for $26.6 million.
The municipal bond market in Puerto Rico is estimated to be worth $70 billion and the losses on close-ended products alone exceeded $2 billion through 2013. Currently, Puerto Rico is seeking to raise investments through additional bond issuances to show that confidence still exists in the government’s ability to pay its debt, but the credit environment is extremely difficult.
“Investor claims against UBS Puerto Rico are just beginning. I anticipate we will have more than 150 cases filed by the summer of this year,” added Mougey.
Joshua is a writer and researcher with Ring of Fire. You can follow him on Twitter @Joshual33.