Puerto Rican Debt Crisis: "A" Rated Puerto Rico Municipal Bonds Called Unsafe

Puerto Rico has more than $70 billion of outstanding debt, with a debt-to-GDP ratio of about 68%. In February 2014, various American credit rating agencies downgraded the government's debt to non-investment grade. This has created a crisis for the Island, a US Commonwealth.

The crisis has forced Puerto Rico's government to adopt policies that it hopes will reduce costs drastically, increase revenues, and spark economic growth so that it can better fund its debt obligations. Puerto Rico's economy has been described as precarious, weak, and fragile, and aggravated by social distrust.

On August 3, 2015, Puerto Rico defaulted on a $58 million bond payment to the Public Financing Corporation, a subsidiary of the Government Development Bank, while other financial obligations were met.

I Think the Government Just Stole My Retirement Funds

I am a 55 -year old saving for retirement. I find "A" rated Puerto Rican Municipal Bonds offering about 5% in double tax free income. So I buy them.

We find out later from a Puerto Rico Senate Report that the agency that issued them may have known they were technically bankrupt and could not pay that money back. We also find out that the rating agencies may have known the government agency was bankrupt but was willing to issue good credit ratings anyway. We also find out later from that same report that the banks may have known all this, but still sell these questionable bonds to unsuspecting investors as a safe investment.

We have four participants, the issuing agencies, the rating agencies, the banks and me, the buyer of the bonds. Pretty simple transaction.

Our legislators see things differently than me. They seem to see the issuing agency as a victim. They see the bond buyers (me) as greedy, selfish individuals. It seems that no one may be allowed to bring up what the rating agencies and banks may have done. Maybe there may be too much Wall Street money going into the legislator's campaign accounts to allow any accountability for the rating agencies and banks.

So our legislators, aided to some degree by press releases, appear to want to convince everyone that the 55- year old saving for retirement in the real villain. The bond buyer should not only lose 50% of their investment in these bonds to market forces, but if there is anything left, according to the PROMESA legislation, that money may go to government pensions because the participant who issued the bonds, never funded their pensions. I guess my retirement money needs to be given to others? What?

How do both political parties get to a place that allows them to support this nonsense? What the heck did I do wrong to get punished like this? I was a responsible person. I am not alone, there are tens of millions of Americans throughout the fifty states that own Puerto Rico bonds. "A" rated bonds should be fairly safe. I certainly shouldn't lose 50 to 100% of my money.

When a person fails to pay their home mortgage they have more cash on hand for gas, groceries and medical care. I have been reading the papers and every nonsensical press release that comes out of Puerto Rico stating the island does not have money for medical services or there are people starving in the streets is picked up by the newspapers immediately. Puerto Rico should have more cash on hand then they have had in a decade. They are not paying their debt. There should be lots of cash on the island. If Puerto Rico is not providing essential services, I suspect it is being done on purpose to promote a possible false narrative that they are the victims and to promote a sense of urgency to push folks into making decisions without better understanding what is really happening to the bond holder's money.

I personally don't get it. In a few years the Municipal Bond Market will cease to function. Municipalities will not be able to raise any money because people, like me, will learn from their experience and stop buying them.

Richard Lawless is a former senior banker who has specialized in evaluating and granting debt for over 25 years. He has a Master's Degree in Finance from the University of San Diego and Bachelor's Degree from Pepperdine University. He sits on a number of Corporate Boards and actively writes for a number of finance publications.

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Richard says that he "is currently working with the SEC and FBI on a possible financial fraud case involving Puerto Rico Bonds." Mr. Lawless has provided both agencies forensic financial audits of specific Puerto Rico bond issues. All data in this article was derived from documents released to the public from various sources.