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Articles Tagged with ubs puerto rico bond funds

The Government Development Bank for Puerto Rico, the Puerto Rican government agency responsible for its debt deals has hired a well-known debt restructuring firm leading many in the financial industry to speculate that Puerto Rico is preparing to revamp its municipal debt.

According to news reports, Puerto Rico officials refused to say whether the firm was hired as part of an effort to restructure the commonwealth’s debt.  However, the firm has represented many financially challenged countries such as Greece, Iraq, Iceland and Argentina.

Puerto Rico’s Constitution prohibits it from filing for federal bankruptcy protection like Detroit or other United States municipalities have done in the past.  Accordingly, the prospect of restructuring Puerto Rico’s debt has caused uncertainty among Puerto Rico bond investors as to the effect such will have because there is no template or precedence to follow.  As Puerto Rico appears to be seeking to reduce its debt load, Puerto Rico investors worry that a restructuring of the debt could result in additional losses to the large losses already suffered on their bond holdings or the closed-end funds held by many of Puerto Rico residents.

In February 2014, Bond Buyer magazine featured a story about Silver Law Group’s representation of many Puerto Rico investors in FINRA arbitration claims against UBS of Puerto Rico for losses in leveraged bond funds.  The article concluded by highlighting Silver Law Group Managing Partner Scott Silver’s concerns that FINRA was not equipped to handle the large number of claims which could easily be anticipated against UBS for selling this complex alternative investment which lost more than 60 percent of its value last fall.

Last week, FINRA finally took public action to address the issue by recognizing the problem and temporarily halting all claims against UBS Puerto Rico while FINRA creates a protocol to administer the cases.  Silver Law Group urges FINRA to quickly address these issues and avoid unnecessary delay.

FINRA and the securities industry force investors to arbitrate all disputes with a broker-dealer through an arbitration clause in the customer agreement.  However, FINRA arbitration is promoted as a fast, inexpensive process for deciding disputes.  Many investors are now frustrated by a system which cannot administratively manage their claims.  Investors have suggested, amongst other solutions:

The Standard & Poor’s and Moody’s credit ratings agencies downgraded Puerto Rico’s general obligation bonds to BB+ and Ba2, respectively, which is below the investment grade status given to most U.S. municipal bonds. The downgrade had been prognosticated by many brokerage firm research analysts, including UBS Financial Services (UBS) over the last several weeks. UBS Financial Services’ recent report Municipal Brief: Puerto Rico Credit & Market Update dated January 29, 2104, predicted downgrade and additional problems for Puerto Rico Municipal Bond Investors. The reported sentiments of UBS Wealth Management research analysts Thomas McLoughlin and Kristin Stephens are clear, “The probability of a downgrade of the Commonwealth’s GO and related bond ratings by all three ratings agencies into the non-investment grade category by the end of the fiscal year (30 June 2014) is high. Given the myriad obstacles facing Puerto Rico, we believe that at least one rating agency will take such an action within the next 30 days.” UBS research opinions were also consistent with recent moves by S&P Dow Jones Indices which oversees the methodology used for constructing the S&P National Municipal Bond Indices that are used by investors to track the performance of municipal bonds issued throughout the U.S.

On December 20, 2013, S&P Dow Jones Indices announced the removal of U.S. territories, including Puerto Rico, from the S&P Municipal Bond “investment grade indices.” According to S&P Dow Indices, the removal of Puerto Rico municipal bonds as a component from the U.S. National Municipal Bond Market indices was due to dissimilarities between the “performance and characteristics” between the U.S. territories, including Puerto Rico, and the universe of “investment grade” municipal bonds issued by states and municipalities throughout the country. These changes were originally to be made on a gradual basis through March 2014. On January 8, 2014, S&P Dow Jones Indices hastened the removal of U.S. territories, including Puerto Rico municipal bonds, from S&P National AMT-Free and S&P AMT-Free Municipal Series Indices which was now effective January 2014 month end.

The removal of Puerto Rico municipal bonds from the universe of “investment grade” municipal bonds could potentially result in increased sell orders from municipal bond portfolio managers driving prices lower. Selling pressure from municipal bond portfolios including large mutual funds that hold Puerto Rico municipal bonds could be required because of fund-imposed “investment grade” mandates or money manager negative sentiment about the Puerto Rican economy. UBS Puerto Rico Family of Funds, including UBS Puerto Rico Fixed Income Funds and UBS Puerto Rico Investors Tax Free Funds, that are leveraged 50% against an underlying portfolio of Puerto Rico municipal bonds which may soon face lower prices. The effects of leverage on further price declines could be disastrous for closed-end funds that are illiquid and non-traded.

UBS Financial Services of Puerto (UBS )recently reported the net asset values (NAV) for their proprietary closed-end funds mat suffer future losses.  These funds are a part of the UBS Puerto Rico Family of Funds which are marketed exclusively to Puerto Rico residents.  The UBS Puerto Rico Fixed Income Funds and UBS Puerto Rico Investors Tax Free Funds, are leveraged 50% and concentrated in Puerto Rico issuers, continue to suffer losses with many Puerto Rico issuer credit ratings coming under review for potential downgrades.  As of January 2, 2014, UBS reported the UBS Puerto Rico Fixed Income Funds and UBS Puerto Rico Investors Tax Free Funds have declined on average another 7.15% and 4.16%, over the last 22 days.

According to UBS Financial Services,  Puerto Rico Municipal Bonds are currently under review for a downgrade in credit quality by Moody’s Rating Agency.   The Moody’s Global Credit Research report dated December 11, 2013 stated that approximately $52 Billion in debt financing is affected by the downgrade review. During the review period, Moody’s reports the downgrade review will focus on the following:

  • The ability to access the debt market for more public finance;

FINRA, the securities industry watchdog, recently updated an Investor Alert for investors who purchase securities with “borrowed funds.”   According to the alert, investments made with borrowed funds by investors grew substantially in 2013.  Investors are warned that the risk of margin calls is significant and they should better educate themselves about these risks before investing with borrowed funds.  Investors must understand investing with borrowed funds and the risks of a margin call, in the event, securities used as collateral decline in value.  The risks investors should understand about margin calls include:

  • the forced sale of securities;
  • no prior notification required;

UBS Financial Services of Puerto Rico has received the attention of many market watchers in the media since their UBS Puerto Rico Family of Funds suffered a “meltdown” in value.  What did not receive adequate media attention are UBS’ sales practices which through the zeal of its financial advisors has left Puerto Rico residents holding excessive amounts of a failed financial product, and in many instances laden with UBS Bank loans.  We have learned firsthand the extent of the destruction experienced by Puerto Rican residents who have been targeted by UBS.

The UBS Puerto Rico Family of Funds, UBS Puerto Rico Fixed Income Funds and UBS Puerto Rico Investors Tax Free Funds, were designed to be sold exclusively to residents of Puerto Rico according to their Offering documents.  The investment objective was tax free income consistent with preservation of capital.  A closer look at the fine print deep in the Offering document tells investors a more cautious tale.

The Prospectus and Offering documents for the proprietary closed-end funds artfully disclose some of the potential risks deemed required by regulatory laws.  The risks include:

UBS Financial Services of Puerto Rico reported, as of December 11, 2013, another large decline in multiple proprietary closed-end bond funds managed by UBS Asset Managers. According to the Prospectus and Offering documents for the UBS proprietary closed end bond funds, UBS Puerto Rico Fixed Income Funds and UBS Puerto Rico Investors Tax Free Funds, UBS Financial Services of Puerto Rico and its financial advisors characterized the bond fund investment objective as current income consistent with the preservation of capital.  For many years, UBS Financial Services of Puerto Rico and its financial advisors recommended that Puerto Rican residents maintain concentrated positions in their family of proprietary closed-end bond funds.

To enhance the yield to investors, UBS Asset Managers had the ability to leverage the investments made in the bond mutual fund portfolios up to 50% of the value of the underlying portfolio.  The leverage resulted in catastrophic losses in the value of the portfolio concentrated in Puerto Rico issued securities sold exclusively to Puerto Rican residents for tax advantaged income.   UBS Asset Managers had an obligation and failed to properly manage the portfolio including effective hedging strategies to protect the fixed income portfolios concentrated in securities issued in Puerto Rico.

UBS Financial Services of Puerto Rico reported the Net Asset Values for the following closed-end funds managed solely by UBS Asset Managers as of December 11, 2013:

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