Hurricane Maria has inflicted tremendous suffering on the Island of Puerto Rico and its 3.5 million inhabitants.
Conditions are still perilous almost two months after the storm. Puerto Rico’s people face a lack of potable water, no electricity for 70% of the island and meager amounts of food and medical supplies. While FEMA and first responders are struggling to save lives, the Island’s financial situation continues to get worse.
The value of Puerto Rico’s General Obligation Bonds continue to plummet and investors are facing the real prospect of a write-off of the debt.
President Trump recently made it worse. In a hasty moment, he said that Puerto Rico’s $74 billion in debt would have to be wiped out and written off by Wall Street and hedge funds holding the paper. Mick Mulvaney, the President’s budget chief, quickly countered that notion, saying that Mr. Trump’s words should not be taken literally. The misinformation was another blow to the bonds, which plunged to record lows of 32 cents on the dollar, according to a report from Bloomberg news.
“Puerto Rico, ravaged by Hurricane Maria on Sept. 20, is dealing with a disaster worsened by the long-term debt crisis that led it to declare a form of bankruptcy this year,” according to Bloomberg reporters Justin Sink and Jennifer Epstein. “The commonwealth’s government for decades has been plagued by budget deficits and borrowed $74 billion in a spree enabled by a yield-hungry Wall Street.”
“After the president suggested that the debt must be erased, a benchmark general-obligation bond due in 2035 plunged 12 cents on the dollar Wednesday morning,” they wrote. “The price later rebounded.”
And this does not even take into consideration Puerto Rico’s $49 billion employee retirement system pension debt and obligation, which has not been funded.
In a recent research note, Moody’s Investor Service said widespread damage from the hurricane has reduced the economic capacity of the island to pay its debts and alters the assumptions that were previously made in the bankruptcy proceeding.
“In the judicial debt restructuring process, a weaker economic outlook could support arguments in favor of lower bond holder recoveries,” according to Moody’s, as cited in a report last month by CNBC.com. The bond ratings agency also stated that “limitations on the government’s capacity to operate electricity systems – as well as ports, water and sewer service and transportation infrastructure – will hurt rate, fee and tax collections while also impeding commerce.”
As if the hurricane and its continuing damage hasn’t hurt Puerto Rico residents enough, many own Puerto Rico closed-end funds and Puerto Rico bonds.
Thousands of these residents have filed arbitration cases claiming investment fraud by brokerage firms who sold the bonds and issued essentially illiquid closed-end funds comprised mostly of Puerto Rico Bonds.
President Trump threw more salt into the wound by tweeting that FEMA won’t be in Puerto Rico “forever.”
It is likely that whatever value investors have in their portfolios of closed-end funds and Puerto Rico bonds won’t be there “forever,” either.
Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.