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We last wrote about UBS Puerto Rico, Santander Securities and Popular Securities brokers recommending that their Mayaguez, Puerto Rico clients get back into the Puerto Rico bond market and we warned you against doing so. We hope you listened because yesterday the Fitch Ratings agency said it may soon strip the heavily indebted Puerto Rico of its investment grade credit rating. Fitch Ratings threatened to tag the U.S. territory with junk bond status. Fitch Ratings said it had placed Puerto Rico's BBB- General Obligation bond rating on negative watch, meaning it was considering a further reduction in the ratings to junk bond status. Undoubtedly, Puerto Rico bond prices will continue to fall, interest rates will continue to rise and the cost of issuing new debt in Puerto Rico will rise as well.

None of this looks good for Mayaguez, Puerto Rico bond investors because the Puerto Rican economy, where interest rates have risen sharply in the last 3 months amid worries about its finances, appears to be tumbling back into recession. The additional financing costs will only accelerate the economic decline.

For example, the cost to insure Puerto Rico debt against default has soared as measured by the credit default swaps market. A contract to insure 100 million of Puerto Rico bonds for 5 years is just below its peak last month of 799 basis points that including the 20.4% or $20.4 million in upfront costs to insure $100 million of Puerto Rico's bonds.

The negative ratings were not limited to Puerto Rico's General Obligation bonds but also attached to the Puerto Rico building authority government facilities revenue bonds, the Puerto Rico Aqueduct and Sewer us Authority bonds and debt issued by the Employees Retirement System of the Commonwealth of Puerto Rico.

We can clearly see a market decline in the prices for the individual Puerto Rico bonds. However, and perhaps it's because UBS Puerto Rico wants to hide the bad news, we cannot see the immediate effect of the lower ratings on the prices of the UBS Puerto Rico Closed-End Bond Funds. UBS Puerto Rico has not published the most recent valuation of the funds. The last reported valuation on the UBS Puerto Rico website was November 6, 2013 as follows:

Name of the Fund - NAV

  • Tax-Free Puerto Rico Fund: 5.189
  • Tax-Free Puerto Rico Fund II: 4.614
  • Tax-Free Puerto Rico Target Maturity Fund: 4.432
  • Puerto Rico AAA Portfolio Target Maturity Fund: 7.779
  • Puerto Rico AAA Portfolio Bond Fund: 7.291
  • Puerto Rico AAA Portfolio Bond Fund II: 8.202
  • Puerto Rico GNMA & US Govmt. Target Maturity Fund: 8.108
  • P.R. Mortgage-Backed & US Govmt. Securities Fund: 6.161
  • Puerto Rico Fixed Income Fund: 3.637
  • Puerto Rico Fixed Income Fund II: 4.267
  • Puerto Rico Fixed Income Fund III: 4.047
  • Puerto Rico Fixed Income Fund IV: 5.204
  • Puerto Rico Fixed Income Fund V: 4.648
  • Puerto Rico Fixed Income Fund VI: 5.549

Think back Mayaguez, Puerto Rico investors and remember what they were telling you last year as the market started to decline. These advisors are only looking for investors to swap out Puerto Rico closed-end bond funds and Puerto Rico bond investments with other investors who have threatened to sue (and rightfully so) for the misrepresentations, unsuitable recommendations, the use of margin or non-purpose loans to buy the bond funds, and/or excessive concentration of their retirement nest eggs in junk bonds.

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. Please see our Instablog profile (left column) for ways to contact us and get answers to any of your questions about this blog post and/or any related matter.