Puerto Rico Bond Update – Puerto Rico has No Money for Bond Payments
Posted on Monday, January 29th, 2018 at 1:22 pm
Erez Law is currently representing more than 100 investors in Puerto Rico and the mainland U.S. in claims against brokerage firms for losses in Puerto Rico bonds and is ongoing in its investigation of brokerage firms across the United States and Puerto Rico who recommended their clients invest in unsuitable Puerto Rico bonds.
In January 2018, the commonwealth issued a revised fiscal plan, which said that the island’s government expects to have $3.4 billion in debt through 2022 (due to the aftermath of Hurricanes Maria and Irma), before any debt service is paid. This forecast predicts that Puerto Rico will have virtually no money to cover debt payments for the next four years, which is a large change from the pre-storm proposal that predicted $3.7 billion (or $800 million per year) through 2022 to cover debts. In 2022, a small surplus is expected.
Puerto Rico suffers from long-term financial and economic deficiencies that rendered its credit increasingly more speculative. The deterioration of Puerto Rico’s financial condition culminated in its debt being downgraded to junk status or speculative (below investment grade). For the past several years, Puerto Rico has been struggling with compounding debt and economic decline. As a result, the value of Puerto Rico’s municipal tax-free bonds has considerably fallen. Since September 2013, when the steep decline in Puerto Rico bond values began, investors holding these bonds have suffered massive losses. After years of losing residents, Puerto Rico began defaulting on its bonds in 2015. In May 2017, Puerto Rico filed for bankruptcy protection from creditors in what is being described as the largest municipal bankruptcy filing in history.
To make matters worse, after the category 4 storm Hurricane Maria devastated the island in late September 2017, Puerto Rico debt fell by 4%, the biggest weekly drop since July 2015. This sharp fall came after Governor Alejandro García Padilla announced that Puerto Rico would ask bondholders to take less than what they were owed. The value of Puerto Rico’s municipal tax-free bonds have considerably fallen. According to USA Today, Hurricane Maria caused losses of $30 to $90 billion, which included the destruction of the island’s electrical grid, homes, businesses, hospitals and roads, and now even more of the island’s obligations will likely need to be written off in bankruptcy.
It is predicted that Puerto Rico’s economy will take a 11.2% hit in the fiscal year (that ends in June), which is the steepest decline since 2003. Puerto Rico’s governor is seeking $94 billion in federal aid, but the island expects a minimum of $35 billion in federal disaster funds from FEMA and $22 billion in insurance claims from Hurricane Maria. However, a 19% decline in population (or 600,000 people) is expected during the next five year, which will put further strain on the economy.
Today, the market outlook leaves investors concerned if they can recoup their losses, as the island expressed a need to withhold debt payments. The administrative says it believe it will be unable to pay bondholders, however the federal board will lead negotiations with creditors and bankruptcy court to decide payments, if any. There are no updates regarding how losses would be distributed among different classes of bonds with competing claims.
Additionally, prices on Puerto Rico bonds have dropped in the aftermath of the hurricanes.
In July 2016, Puerto Rico defaulted on its general obligation (GO) bond debt, and S&P downgraded Puerto Rico’s credit to a “D” rating. On October 11, 2017 in the aftermath of Hurricane Maria, Moody’s downgraded Puerto Rico’s GO, COFINA, and other debt, citing a negative outlook. The GO bonds trade at 26 cents on the dollar, as of January 26, 2018, down from 59 cents on the dollar in September 2017 before the storms.
In July 2017, Fitch Ratings downgraded COFINA bonds to D (in default and the lowest grade rated by this agency). Moody’s currently rates (since April 2017) Puerto Rico Sales Tax Financing Corp./COFINA Caa3 senior, which is categorized as speculative grave and “Rated as poor quality and very high credit risk.” Moody’s forecasted COFINA senior debt between 65 and 80 cents on the dollar, while the Government Development Bank is expected to recover less than 35 cents on the dollars.
COFINA bonds dropped from 12 cents on the dollar on Sept. 7 to 10 cents on the dollar as of October 26. This is due to fewer tourists visiting the island, which has reduced revenues and sales tax collected, and lack of electricity that causes an all-cash economy without the use of credit cards. GO bonds have dropped from 59 cents on the dollar on Sept. 12 to just 37 cents on the dollar as of Oct. 5, 2017 and then 32 cents on the dollar as of October 17, 2017. They currently trade at 26 cents on the dollar as of January 26, 2018.
Additionally, Hurricane Maria almost completely destroyed the island’s electrical infrastructure, leaving PREPA likely without utility revenue for months and causing its bonds to drop 16.8% (as of Sept. 25) since early September 2017. The Puerto Rico Sales Tax Financing First Subordinated Series A were trading at $14 as of October 5 and down to 12 cents on the dollar as of October 26, which is down from 24 cents on the dollar on August 31, 2017 before the hurricane hit the island. As of January 26, 2018, the bonds trade at just 5 cents on the dollar.
The Puerto Rico Sales Tax Financing Senior Series D was trading at 45 cents on the dollar as of October 5 and 41 cents on the dollar as of October 6, which was trading at 55 cents on the dollar on the dollar on August 11, 2017. As of January 19, 2018, the bonds are trading just below 5 cents on the dollar.
At Erez Law, many of our clients come to us because of our specialization in Puerto Rico bond loss cases. We use considerable legal resources to help investors who trusted reckless and unethical financial advisors. We have filed over 300 FINRA arbitration cases against large brokerage firms, including UBS, Merrill Lynch, Santander Securities, Morgan Stanley, Oriental Financial Services, Popular Securities and others, holding these firms accountable for dishonest investment advisory practices, unsuitable recommendations, misrepresentation, and over-concentration in connection with Puerto Rico bonds and funds.
Financial advisors have an obligation to recommend only suitable securities and investment strategies. Stockbrokers also have an obligation to disclose all material risks related to their investments. If a financial advisor recommended Puerto Rico bonds or funds and it was not suitable or appropriate given the client’s risk tolerance or if the broker failed to disclose the risks related to the investment, the broker and the firm may be liable for the client’s losses.
Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If and have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.