Retired and conservative Puerto Rico bond investors last year woke up to the harsh reality that the bonds they were holding in their retirement accounts were one notch above junk bond status.
Indeed, a disturbing report from InvestementNews earlier this week tallied $1.66 billion in bond losses over the first nine months of 2013 for investors in nineteen closed end municipal bond funds packaged by UBS in Puerto Rico and sold by UBS brokers on the island commonwealth.
Expect the fear and loathing for Puerto Rico bond investors to continue. According to the Wall Street Journal, the S&P Municipal Bond Puerto Rico Index – which measures the performance of bonds issued within Puerto Rico – fell 20.47% last year, the worst annual performance since its launch in 2000.
While yields have soared in such bonds, prices have plummeted as many investors have seen on their monthly statements. The declines in their accounts since August 2013 have, in many cases, been in excess of 50%. Hardest hit were investors in UBS bonds and UBS closed end bond funds.
The island commonwealth is struggling with years of recession, a work force that is fleeing and staggering unfunded pension liabilities of close to 90 cents on the dollar. What does 2014 hold in store for Puerto Rico bond investors?
The outlook is bleak as Puerto Rico continues to deal with their disastrous economic situation. All the rating agencies, Moody’s, Standard & Poor’s and Fitch, have warned that there could be a downgrade to junk status.
“Puerto Rico is struggling to convince investors and credit-rating firms that it is on the path to financial health amid rising borrowing costs and fears over a potential downgrade of its debt,” according to Journal reporters Al Yoon and Mike Cherney.
“Puerto Rico is important to the $3.7 trillion municipal bond market because more than three-quarters of U.S. muni mutual funds hold its securities,” according to the Bond Buyer.
If the bonds are downgraded, it is likely that the values would substantially decrease or there could potentially be a default.
Officials in Puerto Rico, of course, are trying to convince the market that the outlook is not as bad as it appears. According to a report from Reuters on Wednesday, Puerto Rico is looking to sell more debt as the government attempts to buy time to enact fiscal reforms. Indeed, Puerto Rico “is readying a return to the U.S. municipal bond market as early as this month after shelving plans for a much-needed capital raising in the final quarter of last year amid a vicious selloff of its bonds,” according to Reuters.
Many believe any move by Puerto Rico to reform its reckless borrowing is too late. “We suspect Puerto Rico will become America’s Greece,” wrote Larry McDonald last week for Forbes.com. “An unsustainable, systemic debt bomb has been formed,” he wrote.
UBS Puerto Rico bond investors buckle your seatbelts. It could be a very rocky road indeed in 2014.
Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions. For more information about Zamansky LLC, please visit https://www.ubspuertoricofunds.com/.