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Puerto Rico Takes a Flurry of Body Blows

May 14, 2014 Blog

Like a boxer being pummeled and playing rope-a-dope, Puerto Rico keeps taking repeated body blows and is now staggering.

The government’s ability to collect taxes is falling further and further behind.

According to a report from Bloomberg, Puerto Rico’s Treasury reported that tax revenues for the first ten months of its fiscal year are $356 million below estimates. Corporations are falling behind on their tax payments and even more resident taxpayers are fleeing the Island’s financial mess.

In a recent interview with Cate Long from Reuters, legendary investor and fixed income analyst Jim Grant stated that, due to the commonwealth’s population decline and low labor participation rate of around 40 percent, he was unable to discern any long-term plan to right size the government’s debt load. According to Reuters, Grant “expects that, sooner rather than later, some of its $72.8 billion of debt, spread across 1,500 separate cusips, will be restructured.”

The April budget deficit is potentially disastrous for Puerto Rico bondholders, Long wrote.

“The April shortfall, caused mostly by reduced corporate income taxes, imperils year-end budget figures. It also jeopardizes the recently proposed fiscal year 2015 budget that was proposed by Puerto Rico Governor Alejandro García Padilla,’ she noted.

“If tax collections continue to taper, either substantial additional taxes must be levied or cuts larger than the anticipated $1.5 billion will need to be made for the 2015 budget to be balanced,” Long wrote. “Bondholders have been promised that the 2015 budget will be balanced and that it will not rely on debt borrowing to fill budget shortfalls. April’s tax collections, if not made up in May and June, will make this promise hard to keep.”

Another punch to the gut for Puerto Rico is the pending failure of its financial institutions, namely its small banks.

Puerto Rico-based Doral Financial Corp. is likely to default on more than $150 million in municipal notes and bonds after regulators ruled that receivables from the commonwealth government can’t be included in Tier 1 capital, according to the Bond Buyer’s Robert Slavin.

According to Slavin, “These receivables were $289 million out of the bank’s $679 million of Tier 1 capital. The ruling will force the bank to either increase capital within 120 days or submit a contingency plan to the Federal Deposit Insurance Corp. to sell, merge or liquidate.”

“The same morning Moody’s downgraded a bond and a note issued by the Puerto Rico Conservation Trust Fund to C from Caa3,” Slavin reported. “C is Moody’s lowest possible rating. Doral Financial is the securities’ obligor. The $100 million note was sold with tax exempt interest in 2002. $30 million is still outstanding. The $100 million bond was sold with tax exempt interest in 2001 and all of it is outstanding.”

Doral has had financial problems for years, Slavin wrote.

The only decent news for Puerto Rico is that John Paulson and other hedge fund investors continue to scoop up Puerto Rican bonds and real estate at rock bottom prices, hoping to profit when the restructuring dust settles.

But that doesn’t help the thousands of Mom and Pop investors who were sold Puerto Rico municipal bonds by brokers at UBS and other banks. Those investors are in the fight of their lives and need to watch out for a coming default, the bond market’s knockout punch.

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions, including UBS. For more information about Zamansky LLC, please visit