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The Puerto Rico Economy Nears the Abyss

September 10, 2014 Blog

Like a mad leviathan from the deep that chokes and drowns its prey, the tide of bad news keeps coming for Puerto Rico and threatens to drag the island commonwealth and its bondholders under.

Indeed, Puerto Rico faces a massive fight on multiple fronts. It continues to deal with a struggling economy, a flight of citizens to the United States and huge budget deficits.

These events pile the misery onto Puerto Rico residents who were sold Puerto Rico bonds and closed end funds by UBS brokers and other financial advisors.  Puerto Rico residents’ portfolios have tanked as their bonds and bond funds have been downgraded to junk status.  Many investment fraud attorneys have filed claims to seek recovery of those losses and securities regulators are furiously attempting to unearth the truth about the sale of these bonds and bond funds.

Puerto Rico’s economy is staggering under the weight of these events. According to Reuters, economic activity in Puerto Rico fell in July for a nineteenth straight month to a twenty year low. The report cited a government economic activity index published last week.

The Government Development Bank’s Economic Activity Index (EAI), fell 0.7% year-on-year in July.  That brought the Index level back to 125.1, the lowest since 1994.

Meanwhile, Puerto Rico looks like it is preparing to throw its bondholders overboard.

The Puerto Rico Electric Power Authority (PREPA), has hired AlixPartners, a prominent restructuring outfit and consultant, to try to restructure its debt.  PREPA has been unable to pay its $670 million in loans to a group of Wall Street lenders, according to a recent report in the New York Times.

Restructuring experts, including the law firm of Cleary Gottlieb and advisory boutique Millstein & Company, have been spending time on the Island working with the government and various Puerto Rican entities.

A restructuring deal for PREPA does not necessarily improve the burden of day to day life for Puerto Rico’s people, according to the report, by Michael J. De La Merced and Michael Corkery.

“PREPA produces power with oil, which is extremely costly,” according to the two reporters. “It has long sought a shift to other power sources, particularly natural gas, but has spent so much on both the oil and debt payments that it has little left over to convert power plants. Its oil-based electricity, which costs twice as much as electricity on the mainland United States, has become so expensive that high electric bills have forced some small businesses to close.”

As the news gets worse, the investors who bought Puerto Rico bonds and bond funds continue to see their portfolios spiral downward.

It looks like the debt restructuring will not help the situation. Puerto Rico – along with the Mom and Pop investors who bought the commonwealth’s bonds – is heading toward the abyss.

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