Puerto Rico's bond losses hit local investors

Reuters

Sept 29 (Reuters) - The steep decline in prices of PuertoRican bonds on the American municipal bond market is taking aheavy toll at home, where local institutions and individuals ownan estimated 30 percent of the $70 billion of outstanding bonds.

Heightening worries in recent months about Puerto Rico'sshrinking economy, double-digit jobless rate and per capitadebts far higher than in any U.S. state touched off a wave ofselling and briefly pushed some Puerto Rico yields to over 10percent.

The yield on Puerto Rico's general obligation 30-year bondhit a recent peak of 8.58 percent, up from 5.49 percent on June30. The steep drop in prices, which move inversely to yields,has hit local banks and closed-end and mutual funds marketed tobond buyers in Puerto Rico. Some of the Caribbean island's bondsfell to as low as 60 cents on the dollar.

Attorneys specializing in securities industry cases estimatelosses tied to the sell-off of as much as hundreds of millionsof dollars for the year, though Financial InstitutionsCommissioner Rafael Blanco said it was "impossible" toaccurately tally the damage.

The Financial Institutions Commissioner does not track thesubstantial investments made by island residents throughstate-side brokerages, nor the holdings of insurers or pensionfunds.

Local attorney Harold Vicente, who said he is preparingarbitration action against UBS Puerto Rico on behalf of 15 ormore clients, said an initial review showed losses among hisclients of "tens of millions of dollars." Some retirees, hesaid, were "totally wiped out."

UBS Puerto Rico is the island's market leader in closed-endfunds, operating more than a dozen. Its Tax-Free Puerto RicoFund Inc. had a net asset value of $5.242 on Sept. 18, down from$6.73 on Sept. 4 and $9.55 on Jan. 31.

Santander Securities and Popular Securities also runclosed-end funds with Puerto Rico bond holdings that sufferedlosses.

Many Puerto Ricans invest in the island's debt throughclosed-end mutual funds, which in several cases held more than70 percent of assets in Puerto Rico bonds and employedleverage that magnified this month's losses.

Vicente said he would file cases on behalf of the investorswith the arbitration unit of the Financial Industry RegulatoryAuthority, Wall Street's industry-funded watchdog, whereinvestors must typically resolve disputes with their brokerages.

Vicente said the cases would allege that the amount ofleverage involved was clearly "an unsuitable investmentstrategy" for his clients.

Brokers must recommend investments that are suitable basedon age, risk tolerance and other factors.

UBS spokeswoman Karina Byrne said investors in the UBS fundswere regularly apprised of the financial risks through periodicstatements.

In addition, she said, Puerto Rico government rules requirethat two-thirds of the securities in its local tax-free funds bePuerto Rico securities in order for an investor to earn a localtax exemption.

"General weakness in municipal markets across the U.S. andPuerto Rico, and apprehension about the direction of interestrates, have led to steep declines in Puerto Rico municipal bondand closed-end fund prices and a lack of liquidity for thesesecurities," Byrne said.

Byrne said the recent volatility of the municipal bondmarket caused both "losses and unrealized losses" amongclosed-end mutual fund investors, but would not provideestimates because the firm was still gathering information.

Attorney Jeffrey Erez, who estimated losses at "hundreds ofmillions of dollars," said many fund investors also usedleverage to buy shares of the fund and were especially hard hit.

Shares in the funds have become illiquid, said Erez, whosefirm Miami-based firm Sonn-Erez has teamed up with island firmAldarondo & López Bras to advise investors on potential legalremedies.

Banks in Puerto Rico reported $533 million in Puerto Ricogovernment bond holdings as of Aug. 31, according to the Officeof the Financial Institutions Commissioner. Puerto Rico assets,including sizeable holdings of Puerto Rico bonds, held by mutualfunds were $9.2 billion on Aug. 31, down from $11.4 billion ayear earlier, according to the commissioner's office.

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