Puerto Rico Investors Bracing For Default

The clock is ticking towards a default by Puerto Rico on its massive municipal bond debt.

According to a report last week in the Financial Times, some creditors met in New York City to discuss a possible restructuring of Puerto Rico's massive $70 billion debt with "restructuring specialists."

The specialists, it was reported, said that a restructuring "appears increasingly likely".

The outlook for Puerto Rico bondholders is grim, according to the FT's Henny Sender.

"Puerto Rico's status as an unincorporated territory makes a Chapter 9 filing for bankruptcy protection for local governments, such as the Detroit municipal filing last July, impossible," Sender reported. "That situation complicates any negotiations with creditors."

He continued: "The territory's debt service burden requires it to pay between $3.4 billion and $3.8 billion each year for the next four years. As doubts grow about the ability of the commonwealth to service that debt, the cost of doing so will inevitably rise."

"The numbers are untenable," one restructuring adviser told Sender. "To issue new debt the yield would have to rise and where they can't raise new money they will have to stop paying."

He concluded that, "if Puerto Rico was forced to take that step, the effects would probably ripple through the entire $4 trillion municipal bond market."

The plot thickened when, apparently in reaction to the FT's report, Puerto Rico officials quickly denied the speculation that a restructuring of its debt was being considered, according to the Bond Buyer's Robert Slavin. "Puerto Rico will take every step necessary to continue honoring its obligations," a government statement said.

The grim outlook for Puerto Rico municipal bond investors is nothing new. In fact, UBS, the leading underwriter and enabler of Puerto Rico bond offerings and UBS closed-end funds, reported over a year ago that the firm expected "more downside than upside momentum" to Puerto Rico's credit. It also reported that Puerto Rico's "reliance on regular access to the capital markets to finance a diminishing structural deficit constitutes the most pronounced credit risk for investors."

The clock is also ticking on a downgrade to "junk" status by the three rating agencies, Moody's Standard & Poor's and Fitch, which have had Puerto Rico on "negative watch" for more than a month. The island commonwealth is facing a potential downgrade by the end of this quarter.

While the Puerto Rico government is scrambling to rearrange the deckchairs on its Muni Bond Titanic, the powerful Teachers Union said that they will not bear the brunt of economic cuts to their pension system and have gone to court to stop the cuts.

There is even talk about federal government renewing a tax on Puerto Rican rum to help balance the budget deficit. If a default occurs, it may be that there isn't enough rum on the island to drown investors sorrows.

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/.