For those that have studied the Bible, the Book of Revelations says Armageddon is the site where the world will end. In generic terms, the word is used to describe the end of the world. For holders of Puerto Rico bonds, their world moved one step closer to Armageddon this weekend when Assured Guaranty refused to extend an agreement that protects one Puerto Rico bond issuer from lawsuits seeking to declare the bonds in default.
Assured Guaranty is a private company that backs many bond issuers throughout the United States. It is one of the largest bond insurers in the U.S. One of the issuers guaranteed by the company is PREPA, the Puerto Rico power authority. PREPA has issued more than $9 billion in bonds and is in technical default. No action has been taken, however, while the authority was in workout negotiations.
Beginning last year, PREPA entered into a forbearance agreement with bondholders, lenders and guaranty agencies such as Assured Guaranty. The forbearance agreement expired over the weekend, however, and has not been extended.
According to published reports, Assured Guaranty released a statement saying, “While a consensual resolution that benefits PREPA and all of its stakeholders is our preferred path, we declined extension of the forbearance agreement to underscore the urgency of the negotiations and to reserve all available options to protect our contractual rights.”
PREPA claims it has obtained another forbearance with lenders but that agreement expires later this week.
What does this mean for investors of Puerto Rico bonds?
Directly, the refusal of Assured Guaranty to extend its forbearance agreement is only of concern to holders of PREPA bonds. With lenders only willing to give the authority an extra week, a full-blown default appears imminent.
Assured’s actions should be of concern to all holders of Puerto Rico bonds. Negotiations are stalling and there is not enough money to pay everyone. Even if the island government lays off much of its work force and dramatically increases taxes (an unlikely scenario), there simply is not enough money to make the payments required by the bonds.
That is bad news for many investors who purchased these bonds hoping to receive steady income through their retirement. Instead of getting their monthly payments, they may lose much of their life savings.
We blame stockbrokers and financial advisors who sold these bonds and companies like UBS that packaged and marketed Puerto Rico bonds as a mutual fund offering. The handwriting has been on the wall for years. The bonds were always “junk” and financial professionals should have done their due diligence before offering them to elderly investors, retirees or those that were looking for a safe investment.
Whether or not there is a default or Congress steps in and creates some type of bankruptcy relief, bondholders are losing hundreds of millions of dollars. If you purchased these Puerto Rico bonds or a bond fund from a broker, however, you may be entitled to recover your losses from the brokerage firm.
As we have previously reported in this blog (use our search feature and search “Puerto Rico bond”), individual customers have been winning cases against UBS and other brokerage firms that sold these products.
Most cases are handled by binding arbitration before the Financial Industry Regulatory Authority. Cases are handles on a contingent (“success”) fee basis meaning no legal fees unless you recover money.
[Our normal minimum loss for stockbroker fraud cases is $250,000. Given the sheer numbers of victims and the repetitive nature of these claims, we will consider smaller loss amounts, especially in cases involving UBS or UBS Wealth Management. On Puerto Rico bonds, we frequently partner with other law firms.]
MahanyLaw – America’s Stockbroker Fraud Lawyers