A Puerto Rico Bond Investor’s Portfolio Gets Scarier With Potential Downgrade To Junk

When a UBS Puerto Rico bond investor looks at their account these days, if they have the courage to do so, they are probably staring at losses over the past two months of 50% to 60%.

And it could get a lot worse. At least one ratings agency, Fitch, is most likely preparing to downgrade Puerto Rico’s bond rating to junk, and that would have disastrous affects for investors in UBS closed-end Puerto Rico bond funds along with a wide swath of municipal bond fund holders.

In other words, it’s getting scarier for investors who own UBS Puerto Rico bond funds as well as other municipal bond funds heavily invested in Puerto Rico.

What happened?

Readers of this blog over recent weeks know the story of Puerto Rico’s municipal debt disaster well by now, but it’s worth repeating.

As Reuters reported last week: “A cut in Fitch’s rating to junk would be widely felt in America’s $3.7 trillion municipal bond market, where Puerto Rico’s $70 billion of high yielding debt is held by many mutual funds and other institutional investors. Interest rates on Puerto Rico debt have shot up in recent months amid worries about its finances and a sputtering economy, which appears to be tumbling back into recession.”

And the outlook is bad. “Fitch said in a news release that it worried that the island’s ability to issue bonds had become limited and weighed on the government’s overall liquidity, which the agency said could be bolstered by the Government Development Bank of Puerto Rico,” according to Reuters. Like Fitch, Moody’s and Standard & Poor’s also rate Puerto Rico’s government obligation bonds one notch above junk. They also have negative outlooks on the island Commonwealth.

As Peter Hayes, head of the municipal bond group at BlackRock told Fox Business news last week: “How are they possibly going to repay that ($70 billion) debt without borrowing more?” Fitch’s warning is a six month precursor to a ratings move downward, Hayes said.

Sad to say, the situation is worsening for Puerto Rico and its bond investors.

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions.