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Puerto Rico – Three Strikes and You’re “Chatarra” or “Junk”

Yesterday Fitch Ratings, the last of the big three national credit rating services, Moody’s, Fitch or Standard and Poor’s, downgraded multiple issues of Puerto Rico debt to what the Puerto Ricans describe as “Chatarra”; that is, “Junk.” Moody’s and Standard & Poors had cursed Puerto Rico bondholders with that same rating just last week. Fitch downgraded the Puerto Rico General Obligation bonds to BB from BBB- along with the Building Authority, Aqueduct & Sewer, and Retirement System bonds. Fitch spared the prized Puerto Rico Sales Tax Financing Corporation Bonds (COFINA Bonds) from any downgrade; they are the only general category that still hold an investment grade rating. However, Fitch’s outlook (direction of ratings over the next 1-2 years) for all of these bonds remains negative.

The key drivers for Fitch’s ratings of the Puerto Rican bonds were reportedly: 1) the reduced financial flexibility of the Commonwealth due to the deterioration in credit ratings; 2) fiscal management or rather mismanagement; 3) economic performance due to the 7-year recession; 4) high debt and retiree benefit liabilities; and 5) impaired capital market access. Fitch noted that Puerto Rico’s constitutional general obligation bond pledge is strong but the Commonwealth cannot file for bankruptcy. Fitch indicated its future rating sensitivities will again depend on: 1) market access; 2) hitting the budget targets; and 3) future credit profile changes.

It is interesting that all three of the credit rating agencies have pointed to Puerto Rico’s access to capital markets as the primary reason for the downgrades. Yet with every downgrade, the Commonwealth’s access to the capital markets becomes more and more impaired. The recent downgrades triggered liquidity demands in various financing agreements to the tune of about $1 billion. The additional financing expenses for the debt service due to the “Chatarra” or “junk” bond status will further pressure the government and the territories ratings.

The three rating agencies’ downgrades hit the Puerto Rican investors’ pocketbooks this week. All of the Puerto Rico bonds in their portfolios declined in value. The good representation of the impact are the February 5, 2014 net asset values (NAVs) published by UBS Financial Services of Puerto Rico for the closed end bond funds that it sponsors:

As we predicted, there was a 10% decline in all of the Puerto Rico bonds issued and outstanding and underlying the UBS closed-end bond funds.

Have you suffered losses in Puerto Rico bonds or closed-end bond fund investments? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation. We have associated with an attorney in San Juan, Puerto Rico, namely Lcdo. Julio Cayere Quidgley, who will meet with you and discuss your case at no charge. Mr. Pearce and Mr. Cayere are accepting clients with valid claims against UBS Puerto Rico, Santander Securities, Popular Securities, Merrill Lynch and Oriental for misrepresentations, overconcentration and/or unsuitable recommendations of its bond funds.

The most important of investors’ rights is the right to be informed! This Investors’ Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over , Attorney Robert Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. Attorney Adam Kara-Lopez habla espaƱol. The lawyers at our law firm are devoted to protecting investors’ rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.