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UBS Drops First Shoe On Puerto Rico Bond Investors

February 4, 2014 Blog

UBS Puerto Rico bond investors better look out; the giant investment bank’s research analysts just dropped the first shoe on your heads.

Last week, UBS issued a report stating that at least one of the Big 3 rating agencies, Moody’s, Fitch or Standard & Poor’s, will cut a swath of Puerto Rico’s debt to “junk” in the next month, according to Michelle Kaske of Bloomberg. The UBS report predicts that the other two agencies will soon follow.

The probability of a downgrade of the Commonwealth’s general obligation and related bond ratings by all three rating agencies into the non-investment grade category by the end of the June 30 fiscal year is “very high,” according to Kaske.

The warning comes way too late for UBS’ retail customers in Puerto Rico whose portfolios are mostly concentrated in Puerto Rico bonds and UBS’ closed-end funds comprised largely of these bonds. These poor folks have seen their retirement accounts get crushed by 50-60% since September 2013.

Bond investors who read this UBS research report must feel like the 2000 and tech stock investors felt when they heard about research analyst’s internal emails describing their stocks as “junk” and “pieces of s—t”.

UBS has been aware of the perils of Puerto Rico debt for years, but, nevertheless continued to recommend that it’s clients put all of their eggs in the UBS Puerto Rico closed end bond fund basket.

Yet another shoe was dropped last week. According to Reuters, Puerto Rico bonds facing possible junk ratings are “no longer part of the S&P National AMT – Free Municipal Bond Index because of the debt’s outsized yields and spotty liquidity”. The result of this policy shift, according to Reuters, “raises worries that demand for Puerto Rico debt from investors tracking the index will soften” when Puerto Rico is readying a bond sale or other possible financing.

This week, the Wall Street Journal reported that Puerto Rico is preparing a debt offering of some $2 billion in the coming weeks. Puerto Rico is trying to demonstrate that it can raise money in a debt offering, however, the yields it will have to pay of up to 10% could likely scare off investors and further reduce confidence in Puerto Rico’s finances.

If UBS is right and a downgrade is imminent, the repercussions for Puerto Rico and Puerto Rico debt holders will be grave. “A downgrade to junk may limit demand for Puerto Rico debt because some money managers can’t buy securities rated below investment grade,” Michelle Kaske of Bloomberg noted. And almost 70% of U.S. muni bond funds hold Puerto Rico securities, which are tax exempt nationwide, according to Kaske, citing Morningstar research.

Mom and Pop investors whose brokers told them that these bonds were a great place to concentrate their retirement and life savings are in for a rude awakening when the expected downgrades materialize.

No doubt, UBS Puerto Rico bond investors, the second shoe will again fall squarely on your heads.

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