According to The Wall Street Journal, Puerto Rico has been engaging in a budget-stretching maneuver, known as the “scoop & toss” for some time now. The tactic, which has been employed by financially strapped local governments, including states, municipalities and other entities for years, is now under closer examination.
Scoop and toss consists of selling new long-term debt to raise money to pay off bonds that are maturing. This lengthens the timetable for municipal bonds that are retiring. Such debt sales frequently provide interest rates that are above market. Many bond buyers can find this attractive, especially when the economy is growing slowly and rates on other bonds are low.
Now, however, observers are cautioning that refinancings using the scoop and toss approach is increasing interest costs and letting civic managers ignore structural economic problems. Meantime, the debt buyers end up taking on the risk that the securities could lose their worth. Critics of the scoop and toss describe it as a short-term solution and not a permanent one.
Puerto Rico, which is in severe debt and has been linked to investment losses over its municipal bonds, has been greatly dependent on bond sales and loans to help balance its budget and pay off bonds that were due. The US territory’s debt, however, remains at around $70 billion. Also, this year, yields on Puerto Rico bonds rose, which has made it more costly to sell debt to investors (especially after credit ratings agencies issued downgrades and put the Commonwealth on negative credit watch for future downgrades).
Now, officials in Puerto Rico want to increase taxes, make entitlement reforms, and stop engaging in scoop and toss by 2015. As its Treasury Secretary Melba Acosta recently said, the territory is moving away from restructuring. The value of Puerto Rican bonds and funds invested in such debt may depend heavily on the ability of the territory to employ these strategies.
Our Puerto Rico municipal bond lawyers have been meeting with investors who suffered losses due to scoop and toss bonds and the bond funds that invested in them. Many of these individuals were clients of UBS Financial Services Inc. of Puerto Rico (UBS), Banco Popular, Oriental, and Banco Santander (SAN.MC) and they worked with their brokers to find what they thought were safe investments.
Unfortunately, even though these bonds and bond funds were promoted as fixed-income, low risk options for investors, these customers did not comprehend that Puerto Rico Bonds could be highly leveraged or that they came with significantly higher risks than their US bond counterparts. Even if you did not directly invest in Puerto Rico muni bonds you may be passively involved. (Research firm Morningstar reports that Puerto Rico bonds appear in 75% of muni-bond mutual funds.) Contact Shepherd Smith Edwards and Kantas, LTD LLP today.
Borrowing Maneuver Catches Flak, The Wall Street Journal, December 2, 2013
UBS offers to repurchase Puerto Rico muni bond funds, plaintiff’s attorneys say, InvestmentNews, November 25, 2013
Puerto Rico: Sand, rum and some risky bond income, CNBC, November 6, 2013
More Blog Posts:
Puerto Rico Paid Wall Street Securities Firms $1.4B in $61B of Bond Sales, Stockbroker Fraud Blog, November 23, 2013
Why did UBS Financial Advisors Recommend Puerto Rico Muni Bonds to Elderly and Retired Investors?, Stockbroker Fraud Blog, November 6, 2013
Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt, Institutional Investor Securities Blog, November 15, 2013