How Low Will UBS Puerto Rico Closed End Funds Go After Junk Downgrade?

Many holders of UBS closed end Puerto Rico related funds are asking how low the valuations on the funds will go after the February 4, 2014 downgrade to junk status.  Unfortunately, nobody knows the answer.  What is known, however, is that the downgrade is very bad news for UBS clients.  According to Standard and Poor’s, the downgraded ratings reflect Puerto Rico’s limited liquidity and the planned near-term $2 billion sale of tax-backed debt that will refinance existing loans “at potentially high interest costs, adding to an already high debt service burden.”  According to S&P, there is little margin for error over the next two years for Puerto Rico on its plan to reduce operating deficits, and potentially difficulty financing future deficits larger than currently projected by the Commonwealth,” S&P analyst David Hitchcock wrote in a report.

The practical impact for the downgrade is almost certain reduced prices for the current holdings in the UBS funds.  More importantly, many non UBS mutual funds that hold Puerto Rican debt will have to sell holdings in order to comply with restrictions in their fund prospectus related to holdings of junk bonds.  This will likely flood the market with Puerto Rican related holdings and thereby further depress most holdings that currently populate the UBS funds.  The downgrade, we believe, is simply very bad news for those UBS clients who continue to hold the funds that have related collapsed.

To discover how UBS can be sued for sales practices related to UBS related Puerto Rican holdings, please call us.

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