Investors in Puerto Rico Bonds and Bond Funds Slammed After Credit Rating Slashed to “Junk” Status by S&P

Standard & Poors has cut the credit rating on Puerto Rico’s general obligation bonds to “junk” status. The downgrade to junk was a long time coming, with many investors viewing Puerto Rican debt as speculative for months. Nonetheless, the continuing fiscal problems on the island coupled with the recent downgrade will have a massive impact on investors around the world.

David Hitchcock, an S&P analyst, discussed the downgrade decision with Bloomberg TV.

Many investors look to municipal bonds like Puerto Rico general obligation bonds for safety and income. They crave the tax advantages and steady interest these types of bonds promise to deliver.

Institutions have loved them, too, with approximately 70% of municipal bond mutual funds holding Puerto Rican debt. UBS in particular went all in on the bonds for its customers, recommending that they invest heavily on a Puerto Rico bond fund, and that they borrow on margin to boost the size of the investments.

But now, with a full-blown fiscal crisis at hand on the island, the love affair is cooling, to put it mildly. As the Righteous Brothers might have put it, investors have lost that loving feeling.

As Michelle Kaske reported for Bloomberg, the bonds themselves are suffering huge losses, having shed over 20% of their value in 2013, performing around eight times worse than the municipal market as a whole. Bond funds holding Puerto Rico bonds are wobbling. And UBS is facing a raft of regulatory and private litigation in connection with their role in peddling the funds.

This story is far from over. FINRA claims against UBS are piling up. Regulatory action against the firm is ramping up. And Puerto Rican debt is still at risk of yet another downgrade. It’s hard to watch and it’s impossible to look away.

If you have suffered a loss as a result of your broker recommending Puerto Rico bonds or bond funds that include Puerto Rico bonds, please contact The Galbraith Law Firm at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.