Puerto Rico is financially under water and quickly running out of oxygen.
As regular readers of this blog know, the news for Puerto Rico and the owners of its bonds keeps getting worse. This past week is no exception.
For the third time since August, a government agency has missed an interest payment on its debt, according to a report this week from Reuters. The agency, Puerto Rico’s Public Finance Corp., failed to make an interest payment due on October 1. It was the third full consecutive payment the agency has skipped, according to the report.
The U.S. Senate held a hearing seeking more details about Puerto Rico’s massive $72 billion debt. Puerto Rico officials told the Senate that Puerto Rico had large debt payments due in November and December and does not have enough cash to pay them. In addition, the Senators were told that the Puerto Rico Retirement System, which has a $37 billion debt, is scheduled to run out of cash by 2018, if not sooner.
“This is one of the reasons that we’re saying that we have to restructure the debt,” one Puerto Rico official told the Senate committee, according to a report in the New York Times. “The idea is to use some of that money to put into the pension plans, because they badly need it.”
Senator Orin Hatch, the chairman of the Senate Finance Committee, said that while he was sympathetic to the Island’s situation, Congress needed more details about the causes and structure of its debt before any help would be forthcoming. As Senator Hatch noted: “We’d better get the right information, or nothing’s going to be done,” according to the Times report.
In other words, the Senate is kicking the can down the road for Puerto Rico and its bond holders.
Making matters worse, the five year debt restructuring plan laid out last month by Puerto Rico’s government appears to lack a foundation on which it can work successfully.
Furthermore, Puerto Rico is experiencing a damaging “brain drain;” skilled professionals over the last decade have left the island in droves. And Puerto Rico just imposed a new 4% tax on professional services, for engineers, lawyers and accountants. That’s on top of a 7% tax currently levied on business services.
Times are getting desperate. Puerto Rico’s government recently sued a municipal collection agency for $400 million in local property tax revenue. The government alleged the tax revenue was being illegally held by the collection agency. At issue is whether the money should be released to service local residents or to pay “faceless bondholders” on the mainland, according to a report in the Times.
One bright spot was a settlement last week by the Securities Exchange Commission and FINRA with UBS Puerto Rico. The regulators levied fines and a restitution order of $34 million against UBS for failing to disclose the risks of their UBS Puerto Rico closed end bond funds to investors. While the $34 million is a mere wrist slap, numerous arbitration cases are going forward in which investors are seeking to recover their losses against UBS for the sale of UBS-Puerto Rico closed end bond funds.
Puerto Rico needs major financial assistance or it will drown under its debt. If the Senate continues to play Scrooge in these negotiations, even a visit to Puerto Rico this Christmas from Santa Claus will be too little, too late.
Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions. For more information about Zamansky LLC, please visit http://www.ubspuertoricofunds.com/.