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Puerto Rico’s Economy Is Gasping For Air

July 28, 2014 Blog

Like a boxer staggering against the ropes at the end of a 15 round, grueling fight, Puerto Rico’s economy is heading down for the count. Meanwhile, Mom and Pop investors in Puerto Rico’s debt face getting the shaft due to a new law that puts government agencies first and investors second.

Puerto Rico’s problems are well known. The island’s $70 billion debt is exploding, residents and taxpayers are fleeing in search of a better life in the states and virtually all government municipal bonds have been downgraded to “junk” status.

But, as a “territory” of the U.S., it cannot go bankrupt like Detroit. However, in a desperate move, Puerto Rico’s government recently passed a law allowing certain government-run corporations like PREPA, its electric utility, to file for bankruptcy and restructure its crushing debt. This move drew a lawsuit by bondholders claiming that the law is unconstitutional as only the U.S. Congress can tinker with bankruptcy laws.

At the same time, many hundreds of retirees, whose portfolios at UBS and other banks were comprised of bond funds holding degraded government debt, have hired investment fraud attorneys to try to recoup their losses.

With the force of a summer storm gathering strength and churning offshore, steep losses are coming for Puerto Rico and its investors, according to Nick Brown and Tom Hals of Reuters.

“Momentum is building toward a deal that would make painful losses inevitable for investors holding about $20 billion in bonds issued by Puerto Rico’s highway, water and electricity authorities even as some big U.S. mutual funds launch a legal battle to squelch a new law that authorizes a restructuring,” according to Brown and Hals’ report. “The Puerto Rican government and most of its creditors have hired U.S.-based bankruptcy experts to advise them through the Caribbean islands efforts to solve its debt problem, and the resolution figures to look a lot like a U.S.-style bankruptcy.”

The key issue for Puerto Rico investors is the new law allowing bankruptcy for Puerto Rico’s agencies, according to Reuters and other news reports. “The crisis came to a head late last month when Governor Alejandro Garcia Padilla pushed through the Public Corporations Debt Enforcement and Recovery Act to create a bankruptcy-like process for restructuring the debt of commonwealth-run corporations. That caused prices on some of the bonds of the electric utility, known as PREPA, to fall to 40 cents on the dollar or below. PREPA is widely viewed to be in the weakest condition of the agencies.”

Meanwhile, mutual fund giants like Oppenheimer and Franklin Templeton want to roll back the new law.

“Municipal bond mutual funds including Oppenheimer & Co. and Franklin Templeton sued to block the law,” according to Reuters. “Some of their funds have suffered negative returns since the Recovery Act triggered the decline in Puerto Rico bonds, a long-time favorite among fund managers thanks to their triple tax-free status and fat yields.”

Unfortunately, retail bond investors are likely to suffer the biggest blow from Puerto Rico’s impending disaster.

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