Puerto Rico Bonds Devastated by Hurricane Maria
Posted on Thursday, November 2nd, 2017 at 2:40 pm
Erez Law is currently investigating brokerage firms across the United States and Puerto Rico who recommended their clients invest in unsuitable Puerto Rico bonds.
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. In May 2017, Puerto Rico filed for bankruptcy protection from creditors in what is being described as the largest municipal bankruptcy filing in history. This filing came about after Governor Ricardo Rossello failed to persuade Puerto Rico’s creditors to settle for a reduced payment amount, the government faced new lawsuits pending from their defaults, and the proposed 10-year fiscal plan only (see our previous post here) that was approved in March 2017 covered a quarter of the debt payments necessary for the island.
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. Today, the market outlook leaves investors looking for different ways to recoup their losses.
Puerto Rico’s recovery from the hurricane has been slow. 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.
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. COFINA bonds have 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 27 cents on the dollar as of October 26, 2017.
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. 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.
Continued volatility is expected, according to the Bond Buyer. The Municipal Markets Analysts (MMA) Outlook continues to grow more bearish with respect to Puerto Rico’s ability to secure (and effectively deploy) federal or third-party funding for its recovery. The slow recovery from Hurricane Maria will likely permanently reduce the Puerto Rico economy as residents emigrate away from the island. Additionally, analysts are pessimistic about bond prices, considering debates between local and federal governments over aid; long recovery timelines; uncertainty related to the Oversight Board; uncertainty over when bankruptcy court hearings will resume; possibility of loss of economic activity after the hurricanes; and misrepresentations of the economic circumstances by local government. One analyst at the Bond Buyer expects bankruptcy recoveries at levels from 10 to 20 cents on the dollar.
Eliminating the island’s debt would speed recovery, but it would leave a trail of investors behind including Puerto Rico residents, hedge fund manager, and investors and retirees throughout the United States, who will suffer significant losses. Additionally 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 in early October 2017, President Donald Trump, when asked about Puerto Rico’s debt problem, made a statement, “They owe a lot of money to… Wall Street, and we’re going to have to wipe that out.” Following that comment, Puerto Rico’s bonds took a dive to an all-time low and dropped to 37 cents on the dollar, according to CNBC. Puerto Rico is likely not going to be able to rebuild or recover unless the debt is cancelled.
Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, brokerage firms across the country may be liable for investment or other losses suffered by its customers.
Erez Law represents investors in the United States for claims against brokerage firms across the country who recommended their clients invest in unsuitable Puerto Rico bonds. If you 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.