The steep decline in prices of Puerto Rican bonds has caused local investors substantial investment losses in assets that many are claiming were sold to them as safe and secure bonds. According to a New York Times article, Puerto Rico’s woes stem from the fact that its 3.7 million residents have approximately $87 billion of debt outstanding (about $23,000 of debt for every man, woman, and child) and spiraling pension costs. Further, Puerto Rico has experienced a rapidly declining population and double-digit unemployment causing the debt to be left behind to a smaller and poorer population to shoulder the debt burden.
Bond losses have been so great that Puerto Rico has been effectively shut out of the bond market and is now financing its operations with bank credit and other short-term measures that are unsustainable. The commonwealth’s bonds are widely held by local mutual funds issued by Puerto Rico’s largest brokerage firms including UBS Puerto Rico, Popular Securities, Inc., and Santander Securities, Corp. If the situation continues to worsen some fear that Puerto Rico will need some sort of federal action and bailout, an action without precedent.
Investor loss estimate tied to the bond fund sell-off have reached hundreds of millions of dollars. However, an accurate tally of the total damages is impossible at this time. Some investors have begun filing claims against their brokerage firm claiming that the losses have substantially or completely wiped out their retirement savings. These investors have claimed that their brokerage firm sold the bond funds as safe, stable, income producing investments. However, the bond funds not only had concentrated credit risk in Puerto Rican securities but also, in the case of the UBS leveraged funds, employed leverage of over 53%, exacerbating the losses. Comparatively, municipal bond funds domiciled in the United States are allowed to use only about half as much leverage as employed by the UBS funds.
Investors have claimed that broker recommendations in the Puerto Rico bond funds were not suitable based upon their age, risk tolerance, and other factors. Investors claims also allege that their broker placed their accounts excessively and sometimes exclusively in Puerto Rican bond funds. While a small investment in a particular product or sector may be suitable for the investor, a large portfolio concentration in the same risk exposure or similar product type will be unsuitable. In this case, the investors are claiming that up to 100% of their entire liquid assets were invested in Puerto Rico bonds exposing the investors to undiversified risks associated with the local market. While investor losses vary fund to fund, as of early October 2013, the following UBS funds have suffered losses as follows:
|UBS Puerto Rico Fund Name||NAV||As of Date||Approximate Loss (%)|
|Tax-Free Puerto Rico Fund||$ 4.93||9/30/2013||-50.7%|
|Tax-Free Puerto Rico Fund II||$ 4.43||9/30/2013||-55.7%|
|Tax-Free Puerto Rico Target Maturity Fund||$ 4.56||9/30/2013||-54.4%|
|Puerto Rico AAA Portfolio Target Maturity Fund,||$ 7.83||9/30/2013||-21.7%|
|Puerto Rico AAA Portfolio Bond Fund||$ 7.33||9/30/2013||-26.7%|
|Puerto Rico AAA Portfolio Bond Fund II||$ 8.16||9/30/2013||-18.5%|
|Puerto Rico GNMA & U.S. Government Target Maturity Fund||$ 8.04||9/30/2013||-19.7%|
|Puerto Rico Mortgage-Backed & U.S. Government Securities Fund||$ 6.04||9/30/2013||-39.6%|
|Puerto Rico Fixed Income Fund||$ 3.44||9/30/2013||-65.6%|
|Puerto Rico Fixed Income Fund II||$ 4.01||9/30/2013||-59.9%|
|Puerto Rico Fixed Income Fund III||$ 3.83||9/30/2013||-61.7%|
|Puerto Rico Fixed Income Fund IV||$ 4.90||9/30/2013||-51.0%|
|Puerto Rico Fixed Income Fund V||$ 4.33||9/30/2013||-56.7%|
|Puerto Rico Fixed Income Fund VI||$ 5.43||9/30/2013||-45.8%|
|Puerto Rico Investors Tax-Free Fund||$ 3.90||10/2/2013||-61.0%|
|Puerto Rico Investors Tax-Free Fund II||$ 3.80||10/2/2013||-62.0%|
|Puerto Rico Investors Tax-Free Fund III||$ 4.16||10/2/2013||-58.4%|
|Puerto Rico Investors Tax-Free Fund IV||$ 3.65||10/2/2013||-63.5%|
|Puerto Rico Investors Tax-Free Fund V||$ 3.91||10/2/2013||-60.9%|
|Puerto Rico Investors Tax-Free Fund VI||$ 4.76||10/2/2013||-52.4%|
|Puerto Rico Tax-Free Target Maturity Fund||$ 1.07||10/2/2013||-89.3%|
|Puerto Rico Tax-Free Target Maturity Fund II||$ 1.58||10/2/2013||-84.2%|
|Puerto Rico Investors Bond Fund||$ 4.28||10/2/2013||-57.2%|
Popular Securities bond funds include:
Puerto Rico Investors Tax-Free Funds,
Puerto Rico Tax Free Target Maturity Fund,
Puerto Rico Investors Flexible Allocation Fund – Income Portfolio,
Popular Income Plus Fund,
Popular High Grade Fixed-Income Fund.
Santander Securities funds include:
First Puerto Rico Tax-Exempt Fund I-VII,
First Puerto Rico Tax-Advantaged Target Maturity Fund I-II,
First Puerto Rico AAA Target Maturity Fund I-II,
First Puerto Rico Target Maturity Income Opportunities Fund I-II,
First Puerto Rico AAA Fixed-Income Fund,
First Puerto Rico Intermediate Fixed-Income Fund.