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Puerto Rico Is Drowning

June 22, 2015 Blog

The Puerto Rican economy is akin to a drowning man swimming against the tide with no lifeguard in sight.

Puerto Rico government bonds continue to be downgraded by the rating agencies. The bonds of its electric utility, PREPA, are rated by Moody’s as “the lowest category possible,” according to a recent CNN Money article.

One of PREPA’s biggest problems is, it’s an “inefficient” energy provider dependent upon burning crude oil, according to Moody’s. Other Caribbean nations use natural gas and renewable energy for power.

Furthermore, PREPA has $9 billion in total debt. Compare that to the $7 billion of debt held by Detroit when it filed for bankruptcy a few years ago. The market for Puerto Rico bonds is focused on PREPA’s $400 million debt payment coming due next month. Many believe the utility isn’t likely to make the payment.

As regular readers of this blog know very well, Puerto Rico’s debt crisis is a long-term problem. With the island’s overall economy in decline, residents are fleeing the island for the US mainland at the highest rate in decades. Fleeing residents means a shrinking tax base. According to PEW Research, there are now more Puerto Ricans in Florida than in Puerto Rico.

“Every time someone leaves Puerto Rico, it only exacerbates the situation,” according to the CNN Money article, reported by Patrick Gillespie. “It shrinks the island’s tax base, which the government needs to pay for itself and its debts. In recent years, the government just issued even more debt to pay off its current debt. The looming default may foreshadow a difficult dilemma for the government. It must start making decisions between what’s best for its people and what’s best for its creditors.”

“Those two obligations are coming into conflict here,” wrote Gillespie, citing a Moody’s analyst. “Puerto Rico’s economy has languished and its citizens have been leaving the island to come to the mainland.”

Meanwhile, a member of Congress is calling for a control board to take over the island’s beleaguered government, which is one of the strongest bids yet for federal intervention into Puerto Rico’s fiscal woes, according to a report on Friday in the New York Times.

Representative Jeffrey D. Duncan, a South Carolina Republican, sent a letter to his fellow lawmakers on Friday, urging them for a solution to Puerto Rico’s financial problems that may result in “management changes” in the commonwealth.

“I believe legislation to require the establishment of a financial control board, to enable the politically unpalatable changes necessary to put Puerto Rico back on the road to self-determination, may be needed,” wrote Mr. Duncan, who is chairman of the Subcommittee on the Western Hemisphere of the House Foreign Affairs Committee.

“Mr. Duncan’s letter is the latest salvo in the battle between Puerto Rico and its creditors,” noted the Times. “The island is quickly running out of cash to pay its debts, leading many analysts and investors to conclude that the commonwealth may default. Mr. Duncan’s call for a control board will most likely find favor with hedge funds and other investors that own billions of dollars of Puerto Rico municipal bonds and are seeking to head off a default or debt restructuring.”

What’s clear is that Puerto Rico’s economy is, at best, treading water and at worst, about to go under. Its residents whose portfolios are largely comprised of Puerto Rico bonds and UBS closed end funds are clearly at risk of drowning.

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