Although Puerto Rico’s economy was struggling before being ravaged by Hurricane Maria, the aftereffects are impacting the investment market in waves.
In May 2017, Puerto Rico claimed bankruptcy. The island had long struggled financially and owed over $70 billion dollars in bond obligations. In addition to the bond debt, Puerto Rico has $49 billion dollars in unfunded pensions in near insolvency. The debt Puerto Rico has amassed represents close to 70 percent of the island’s gross domestic product (GDP), whereas in the U.S. the average debt-to-GDP ratio is only 17 percent.
A history of investments
Investors were drawn to Puerto Rico due to its tax advantages and high returns. They invested heavily in municipal bonds. In these bonds, Puerto Rico was essentially lending money with interest to bondholders, but too much money was lent in bond debt. Economic decline widened the budget deficit and Puerto Rico was forced to borrow money to maintain government programs.
Financial advisors and investment firms recommended Puerto Rico municipal bonds, even though the bonds were substantially risky. Those risks were often downplayed in order to generate sales. UBS Investment Bank was one of the largest invest firms selling Puerto Rico bond funds and profited heavily from the sales, earning money from sales commissions and fees.
Today’s market
As the Puerto Rico municipal bond market deteriorates, investors pressured into buying bonds are watching their profits disappear. Investors face the undesirable choice of waiting out the market or liquidating their remaining shares at a significant loss. As Puerto Rican residents struggle to rebuild amidst a crippled infrastructure, investment firms are laying in the bed they created.
While no investments are guaranteed, investors who were misled into purchases have options. If you purchased Puerto Rico bonds after being mislead by your financial advisor there may be legal recourse.