On Sunday, May 1, 2016, Puerto Rico Governor Alejandro Garcia Padilla announced the island would not meet its obligation on May 2, to pay $389 million in interest payments due to bondholders of the island’s Government Development Bank. The Government Development Bank is an entity that acts as the island’s primary fiscal agent and lender of last resort. The default on the Government Development Bank debt is not the first time Puerto Rico has failed to meet its credit obligations; it is sadly, just the most recent.
Due to a quirk in the bankruptcy laws, in the mid-1980s Puerto Rico’s ability to file bankruptcy was removed and as such the island now has little recourse to restructure its debts. While it awaits action from the United States Congress to provide a legislative work-around to the problem, the island’s economic calamity compounds and further defaults can be expected.
In the mainland, there is a concerted “dark money” advertising and lobbying effort being undertaken by what many assume to be the “vulture capitalists” that have made bets on Puerto Rico’s debts. Their efforts are to prevent the legislative workaround which the island so desperately needs. These “vulture capitalists” are often unknown hedge funds who purchased Puerto Rico’s distressed debt for pennies on the dollar and are seeking to prevent the island from restructuring its debt through bankruptcy. The “vulture capitalists” instead want to use the courts to get the highest possible return on their capital or at a minimum restructure the debts in a manner that is more favorable to them than to Puerto Rico. That would obviously be a good deal for the hedge funds that cheaply bought Puerto Rico’s debt but what about the average retail investor, what is good for them? Sadly, it is often the retail investors who are left out in the cold.
Retail investors are the mom and pop investors who often rely on financial advisors all over the United States to assist them in planning for their financial futures. How have retail investors fared in the Puerto Rico debt crisis? Not well by many accounts. Over the last several years, many investors in the United States have been sold Puerto Rico bonds – either directly or indirectly through investment products like mutual funds. Financial advisors and brokers have sold Puerto Rico Bonds to American investors as safe and stable bonds that provide exceptional yield. It is true the bonds offer attractive interest rates – that is after all, how bonds work, the riskier the debt the higher the yield. There is however, nothing safe or stable about Puerto Rico bonds. Many investors, and sadly too many financial advisors, believe that all bonds are safe and bond interest payments are guaranteed. This is simply untrue. Bonds carry many risks, including default risk. This lesson has been learned the hard way for retail investors in Puerto Rican debt.
It is one thing for savvy Wall Street hedge funds to make calculated bets on Puerto Rican debt but it is quite another for the average American investor to do so. If you are an investor who was sold Puerto Rico bonds or other debt offerings by your financial advisor without the advisor fully explaining all of the risks associated with the investment beforehand, you have legal rights and may be entitled to a recovery by filing claims in FINRA arbitration against the brokerage firm who recommended that you purchase the investment. Our firm currently represents investors across the United States who were sold Puerto Rico bonds by their brokers. Call the investor rights attorneys at Chapman LLC today for a free initial consultation. Our attorneys are currently available to assist those who invested in Puerto Rico bonds and can be reached toll free at 877-410-8172.
