UBS Says Puerto Rico Bonds to be Downgraded to Junk

UBS analysts predict that at least one rating agency will downgrade Puerto Rico bonds to junk status within the next month.  

In a municipal brief for investors (PDF) issued on January 29, UBS analysts Thomas McLoughlin and Kristin Stephens reported that problems were mounting for the commonwealth of Puerto Rico, and that downgrade to non-investment grade, also known as a junk grade, is very likely.

The analysts said investors should expect at least one rating agency to downgrade the Puerto Rico general obligation (GO) municipal bonds to junk in the next month, and all three rating agencies to do so by summer.

“The probability of a downgrade of the Commonwealth’s GO and related bond ratings by all three rating agencies into the non-investment grade category by the end of the fiscal year (30 June 2014) is high,” the report states. “Given the myriad obstacles facing Puerto Rico, we believe that at least one rating agency will take such action within the next 30 days.”

All three rating agencies, Moody’s Investor Service, Standard & Poor’s and Fitch Ratings, have threatened that they will downgrade the island territory’s bonds soon if it fails to address its fiscal problems, which include $70 billion in debt. According to the UBS brief, the ratings agencies were scheduled to meet with Puerto Rico financial officials last week.

UBS Puerto Rico Municipal Bond Problems

This appears to be the latest problem for UBS Puerto Rico municipal bond investors, who suffered losses of $1.66 billion during the first three quarters of 2013, according to one consulting group.

UBS faces a growing number of investor lawsuits and arbitration claims over the Puerto Rico bond funds. Investors allege the company misrepresented the risk involved with Puerto Rico Municipal Bonds.

According to allegations raised in many of the complaints, UBS pitched Puerto Rico bond funds as safe and secure, targeting the investments toward elderly people and others who rely on municipal bond funds for retirement.

Puerto Rico municipal bonds funds have spiraled down into junk ratings as the country undergoes an economic crisis. UBS sold many bond funds that were allegedly over-invested in Puerto Rico muni bonds. Although the funds previously provided high yields and involved special tax benefits, UBS has been targeted for how it has handled the problem.

Many individual investors who suffered losses have hired financial fraud lawyers to pursue arbitration claims through the Financial Industry Regulatory Authority (FINRA), which is a non-governmental regulatory body that handles resolution of disputes between investors and stockbrokers and other financial firms. It was created in July 2007, as a successor to the National Association of Securities Dealers, to arbitrate stock broker fraud claims that can include charges of breach of contract, breach of fiduciary duty, negligence, misrepresentation, unauthorized trading and other claims that investments were improperly handled.