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Jan 16, 2014

Little Help For Investors From The Puerto Rico Supreme Court And Rumors

Yesterday, the Puerto Rico Supreme Court temporarily stopped the enforcement of the law signed by Gov. Alejandro Garcia Padilla on Christmas Eve with reformations to the teacher pension system. The Supreme Court blocked the reforms to the pension system that the government insists it needs to avoid a downgrade of Puerto Rico debt securities to junk status. Gov. Garcia Padillo stated “saving the teacher pension system and guaranteeing them sufficient pensions in line with the Island’s fiscal realities is an issue that demands a deep sense of responsibility, as does saving Puerto Rico’s credit rating,” a credit rating that is just one step away from junk status. Today the Supreme Court held a hearing on a lawsuit challenging a separate reform of the pension fund for the judicial system in Puerto Rico. You don’t have to think too hard as to what their decision will be in light of their ruling on teacher pension reform.

Jan 2, 2014

Puerto Rico Borrowing From Self Is Not A Good Sign For UBS Puerto Rico Investors

The latest news from Puerto Rico is that Government Development Bank (GDB) has borrowed $110 million from the State Insurance Fund (SIF) for its liquidity needs. The GDB President attempted to put a positive spin on the loan as achieving two objectives, “increasing GDB’s liquidity and improving the cash flow of SIF,” but borrowing from Peter to pay Paul is never a good strategy, even for a legitimate government. Puerto Rico is ostensibly seeking short-term deals to raise cash as it waits for conditions to improve in the US municipal bond market but the problem is with the Puerto Rico bond market and its economy. Noteworthy is the fact that the GDP still had to pay 8% annually for the loan and then pay it all back in less than 6 years. If 8% is the going rate within the government intra-agency borrowing what are the lenders on the outside going to charge the territory?

Dec 24, 2013

More Downgrades Loom For PREPA and More Losses For UBS Puerto Rico Investors

Standard and Poor’s, Fitch Ratings and Moody’s ratings services have placed Puerto Rico’s general obligation bonds credit rating on negative watch which meant the next step was to downgrade Puerto Rico’s general obligation bonds to junk status. On Friday, Moody’s warned of another possible downgrade; this time of the Puerto Rico Electric Power Authority’s (PREPA) bonds. All three rating agencies have expressed concerns about the Island’s inability to access the market for refinancing and reasonable rates; the extent to which budget targets for the current fiscal year are being met; the instability in the performance of the Puerto Rico economy.

Dec 12, 2013

More Headwinds For UBS Puerto Rico Bond Fund Investors

Three weeks ago, Fitch Ratings placed Puerto Rico’s BBB minus credit rating on negative watch which meant the next step was to downgrade Puerto Rico’s general obligation bonds to junk status. Yesterday, the Moody’s Investors Service joined in Fitch Ratings’ analysis and placed Puerto Rico’s general obligation bonds and related credit on review for possible downgrade to junk bond status as well. Both Moody’s and Fitch, as well as Standard & Poors rate Puerto Rico debt a single level above junk. All three rating agencies have expressed concerns about the Island’s inability to access the market for refinancing at reasonable rates; the extent to which budget targets for the current fiscal year are being met; the instability in the performance of the Puerto Rico economy.

Dec 5, 2013

UBS Puerto Rico Bond Fund Investors Continue To Lose

Although there was a blip in the UBS sponsored Puerto Rico closed-end bond fund prices recently, the net asset values (NAVs) of the various funds have continued their move downward. The decline is a reflection of the Puerto Rican economy which has been in recession for nearly 8 years. The most recent NAV’s published on November 27 and 29, 2013, put the value of the funds as follows:

Dec 3, 2013

Puerto Rico: Default Talk Ramps Up!

A couple of months ago when the press began its aggressive coverage of the Puerto Rican municipal bond market, default was never an option. However, Justin Vélez-Hagan, executive director of The National Puerto Rican Chamber of Commerce has called it inevitable. The Chamber of Commerce official has cited more than 10 facts for his opinion: 1) $70 billion of debt is now held by institutional investors and mutual funds; 2) the debt-to-GDP ratio is now nearly 70% and growing; 3) including pension obligations the debt-to-GDP ratio exceeds 90%; 4) the per capita debt load is $19,000 per person on this tiny island, which is many multiples over the debt load in any state; 5) the eight-year recession has contracted the economy by over 16%; 6) the 2014 budget deficit is estimated between $300-$800 million; 7) the repeal of IRS Rule 936 has caused the giant pharmaceutical manufacturers and many other mainland corporations to continue to close their businesses on the island; 8) Puerto Rico has become a welfare state with only 40% of eligible workers seeking employment; 9) federal government assistance programs account for 21% of Puerto Rico’s economy; and 10) debt service is now 20% of the budget and before long, even if interest rates remain at 9%, the debt service will increase to 30, 40 or even 50% of the budget.

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