Cataclysmicly Bad News for Clients of UBS: Puerto Rico Holdings Downgraded To Junk
Cataclysmicly bad news for clients of UBS who own the Puerto Rico closed end bond funds. Today, Standard & Poor’s Ratings Services lowered its rating on the Commonwealth of Puerto Rico’s general obligation (GO) debt to ‘BB+’ from ‘BBB-‘. Standards and Poor’s also downgraded Puerto Rico’s appropriation secured debt and Employee Retirement System (ERS) debt to ‘BB’. All of the remaining ratings remain on CreditWatch with negative implications.
According to S&P, the reasons for the downgrades deal with the evaluation of the lack of liquidity for the Puerto Rico, including a reduced capacity to access liquidity from the Government Development Bank (GDB) of Puerto Rico. S&P become the first ratings firm to push Puerto Rico’s ratings into junk territory, though peers Moody’s Investors Service and Fitch Ratings each late last year said they were weighing a downgrade.
We believe this news to be extremely bad for current holders of UBS closed end Puerto Rico related bond funds. The downgrade to junk status will almost certainly place massive downward pressure on the funds’ valuations by UBS. In addition, many mutual funds that currently own Puerto Rico related bonds will now have to sell those holdings, thereby placing further downward pressure on the value of the holdings in UBS Puerto Rico bond funds.
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