BlackRock: PR ‘junk’ cut on horizon

10/18/2013 | Filed under: Economía | Posted by: Francisco

BlackRock: PR ‘junk’ cut on horizon

By CB Online Staff

cbnews@caribbeanbusinesspr.com; cbprdigital@gmail.com

Asset management giant BlackRock says Puerto Rico’s credit could be downgraded to junk territory during the next fiscal year.

The world’s largest asset manager, which oversees more than $100 billion in municipal bonds, warned of the potential cut during a media presentation in New York on Thursday, according to reports by Bloomberg and Bond Buyer.

Since December, Moody’s Investors Service, Standard & Poor’s and Fitch all lowered the Puerto Rico government’s general obligation (GO) bond debt to just one notch above junk, or noninvestment grade, and have warned of the potential for further downgrades. The three Wall Street ratings agencies all grade Cofinas solidly within investment level. Most analysts say preserving its investment-grade rating will depend on hitting revenue targets during the current 2014 fiscal year (which started July 1) and an improvement in the economy.

Puerto Rico’s Government Development Bank hosted a presentation Tuesday to provide an update on the island’s fiscal and economic development progress. The administration of Gov. Alejandro García Padilla has been working overtime to head off a potential credit downgrade to junk level, touting an aggressive public pension reform and more than $1.4 billion in new revenue measures aimed at closing chronic budget gaps. It has also outlined a five-year plan for achieving a more diversified, knowledge-driven economy as the island struggles to pull out of a marathon recession dating back to 2006.

Puerto Rico’s economy pulled pack sharply in August as a sustained slide extended to 10-straight months, unemployment (13.9 percent) has ticked up for two straight months and the island continues to shed jobs and population.

The Government Development Bank’s Economic Activity Index (EAI) for August plunged 5.4 percent from the same month in 2012. The cumulative value for the first two months of fiscal year 2014 (July-August) showed a reduction of 5.2 percent with respect to the corresponding figure of fiscal 2012.

The GDB-EAI had returned to growth in December 2011 for the first time since Puerto Rico’s recession began in 2006. It showed small but consistent year-over-year gains for nearly a year before beginning to retreat again last October. Since then, it has been on a steadily steepening decline: falling 0.7 percent in November, 2012, 1.3 percent in December, 2012, 1.8 percent in January, 3.1 percent in February, 3.1 percent in March, 3.5 percent in April and 3.4 percent in May, 4.5 percent in June and 5 percent in July.

The García Padilla administration is forecasting economic growth of 0.2 percent for the current fiscal year, a projection that was used as the basis of the fiscal year 2014 budget. Most economists are predicting continued contraction during fiscal 2014, which began July 1.

Economist Gustavo Vélez, chairman of Inteligéncia Económica, is predicting a decline of nearly 1 percent; Joaquín Villamil, chairman of Estudios Técnicos, is predicting a contraction of at least 1 percent; and Vicente Feliciano, president of Advantage Business Consulting, is expecting an even larger shrinkage of about 2 percent.

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Local investors lost $2.25 billion in September on PR investments

By : JOHN MARINO

marino@caribbeanbusiness.pr; cbprdigital@gmail.com

Local investors lost $2.25 billion last month through mutual fund investments in Puerto Rico government bonds and other island-based securities, according to statistics released Wednesday by the Office of Financial Institutions Commissions (OCIF by its Spanish acronym).

The value of Puerto Rico securities fell to $7.31 billion as of Sept. 30, compared to $9.56 billion the previous month, OCIF figures indicate.

The heavy losses have dried the market for closed-end mutual funds, which currently have little or no liquidity, Financial Institutions Commissioner Rafael Blanco said. The lack of liquidity is exacerbated by rules requiring the tax-exempt funds to only be sold to Puerto Rico residents.

So far this year, local mutual fund investments in Puerto Rico bonds and securities have fallen by $3.7 billion, OCIF figures indicate. When non-Puerto Rico securities are included, local mutual fund investments as a whole are down $4.52 billion so far this year.

“There is no hiding from this. It will have a huge effect,” economist Elias Gutiérrez said of the loss in local wealth.

“It will have a direct effect on investment. It will make potential investors more risk adverse,” he added.

Gutiérrez pointed to the “wealth effect,” an economic tenant indicating that the perception of wealth is also tied to consumption and spending trends, in arguing that it would also impact the broader economy.

“It will have a huge effect on consumption, aggregate demand and consumer behavior across the board,” Gutiérrez said.

Mutual fund Puerto Rico security investments are down 33.6% this year, while the broader mutual fund investment portfolios are down 28.72%, OCIF figures indicate.

Many local investors participating in leveraged closed-end mutual funds saw even larger losses, with many investors being “completely wiped out.”

Closed-end funds typically employ 50% leverage or use borrowed funds to double their assets. This boosts earnings when bonds retain their value, but magnifies losses when bond values drop.

While investors are barred by local securities law and investment firm policy from using borrowed money to buy closed-end fund shares, many brokers and investors used different schemes to get around the prohibitions, according to lawsuits filed on behalf of investors.

Several lawsuits have been filed and more are expected. The biggest target has been UBS Puerto Rico, a market leader operating 23 closed-end mutual funds that had total market capitalization of about $4 billion at their outset and make up about 50% of the firm’s revenue, according to the legal complaints. Since their inception, some funds have lost half their value or more. Popular, Inc. and Santander Securities also operate closed end mutual funds in Puerto Rico.

UBS Puerto Rico CEO Carlos Ubiñas said the business isn’t responsible for “market events.”

“The loss in value of Puerto Rico bonds is tied to market forces and continued doubts over Puerto Rico’s credit,” Ubiñas said in a statement. “The financial industry, and much less UBS, can’t be blamed for market events.”

A $30 million complaint against UBS was filed by attorney Harold Vicente on behalf of retired auto industry executive Víctor M. Gómez Jr. and more suits are expected.

In May 2012, UBS Puerto Rico agreed to pay $26.6 million to settle Securities & Exchange Commission charges it misrepresented and omitted material facts about its Puerto Rico closed-end bond funds.

Meanwhile, minority New Progressive Party lawmakers are pushing for investigations of UBS’ practices in Puerto Rico that have been drawing increased scrutiny after a selloff of Puerto Rico debt in recent months hit its wealth clients very hard.

Rep. Ricardo Llerandi Cruz has filed legislation seeking a Capitol inquiry into UBS. Rep. Ángel Muñoz Suárez said he will file a complaint with the federal Securities Exchange Commission over “dubious transactions.”