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UBS PUERTO RICO OFFERS DAMAGE CONTROL TO BOND FUND INVESTORS

We learned yesterday that UBS Puerto Rico has offered to repurchase some shares of its Puerto Rico closed-end bond funds in an effort to reduce the damages of some investors. The offer is limited to investors its advisors put at peril by borrowing funds from UBS Bank USA to purchase the already leveraged bond funds. When the Puerto Rico municipal bond market began to collapse this summer many of UBS Puerto Rico's best clients suffered margin calls. The margin calls forced liquidations of other securities in their portfolios because there were no buyers for the closed-end bond funds. UBS Puerto Rico had secretly pulled its market support for the closed-end bond funds and they dropped in value like stones in the water. The UBS Puerto Rico advisors recommendation that customers use of non-purpose bank loans to purchase the funds was unlawful and in violation of UBS Puerto Rico policies and procedures.

According to Karina Byrne, a spokeswoman for Switzerland's largest bank, the bank has told advisors to contact clients who took out bank loans and purchased the Puerto Rico closed-end bond funds managed by UBS Puerto Rico affiliates about a limited buyback program. UBS is not giving these investors any special consideration other than an opportunity to sell closed-end bond funds at current net asset value or less to the company. The offers are not being extended to every investor in the funds. Nor are the offers being extended with respect to every closed-end bond fund. The funds are capped to prevent the repurchase of more than 25% of the outstanding shares of the fund and some funds are closer to that limit than others.

Obviously UBS Puerto Rico does not see a recovery in a net asset value of these funds anytime in the near future and fears further forced liquidations. UBS Puerto Rico knows the forced liquidations and severe losses in clients' portfolios as a result of these closed-end funds market decline will undoubtedly lead to more lawsuits and arbitrations and rightfully so. UBS Puerto Rico's offer to repurchase some shares is an attempt at damage control for the firm, not its investors.

Investors are not going to receive any premiums on the sale of shares of these funds back to the company, but a sale today may yield more than a sale in the next 6 months when the Fitch rating agency is expected to downgrade the Puerto Rico municipal bond market to junk bond status. Some of these funds already have net asset values that are severely depressed. For example the Puerto Rico Fixed Income Fund, one of the banks closed-end offerings, had a net asset value of $3.65 on November 20, 2013, the last published valuation on UBS Puerto Rico's website. This fund is down from it's initial offering price of $10 per share; i.e., over 60 percent. All of the funds are down significantly in the last several months with no likelihood of recovery in the near future in light of the recent rating agencies actions. The most recent valuations of these funds from the UBS Puerto Rico website are below:

Name of the Fund - NAV

  • Tax-Free Puerto Rico Fund: 5.122
  • Tax-Free Puerto Rico Fund II: 4.596
  • Tax-Free Puerto Rico Target Maturity Fund: 4.488
  • Puerto Rico AAA Portfolio Target Maturity Fund: 7.629
  • Puerto Rico AAA Portfolio Bond Fund: 7.179
  • Puerto Rico AAA Portfolio Bond Fund II: 8.121
  • Puerto Rico GNMA & US Govmt. Target Maturity Fund: 8.042
  • P.R. Mortgage-Backed & US Govmt. Securities Fund: 6.176
  • Puerto Rico Fixed Income Fund: 3.654
  • Puerto Rico Fixed Income Fund II: 4.273
  • Puerto Rico Fixed Income Fund III: 4.057
  • Puerto Rico Fixed Income Fund IV: 5.181
  • Puerto Rico Fixed Income Fund V: 4.659
  • Puerto Rico Fixed Income Fund VI: 5.533

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.