Standard and Poor’s has announced that it has cut Puerto Rico’s general-obligation bonds to speculative, or one step above junk. This marks the culmination of mounting concern over the territories rising debt woes.
The underlying story is that about 70 percent of U.S. municipal funds hold stakes in Puerto Rican securities due to the strong tax incentives that exist there. This makes the countries products especially risky for investors but potentially appealing to advisors.
“S&P’s decision to lower Puerto Rico’s rating confirms what has been known for some time,” commented Peter Mougey, a shareholder with the Levin, Papantonio law firm who directs the firm’s securities and business torts departments. “Recommending concentrated debt positions, dependent on Puerto Rico’s economy, puts investors at unnecessary and unwarranted risk.
Organizations that have been pushing products backed back Puerto Rico are seeing mounting legal trouble. UBS Puerto Rico is seeing significant backlash to its practice of selling proprietary municipal and leveraged bond funds to its clients.
“This is nothing new; Wall Street consistently takes the position that any risks associated with its activities should be pushed on to clients’ portfolios,” Mr. Mougey added. “These advisors keep making money from the junk their selling in fees and costs and clients keep getting stuck with the bill.
Joshua is a writer and researcher with Ring of Fire. You can follow him on Twitter @Joshual33.