Exclusive: UBS backs away from its Puerto Rico funds after downgrades

Thu Jul 23, 2015 7:34pm EDT
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By Suzanne Barlyn

(Reuters) - UBS AG is backing away from its own Puerto Rico bond funds, warning clients that they can no longer use them as collateral for certain loans after the island's financial troubles resulted in downgrades by major credit rating agencies.

In a July 13 letter to clients, reviewed by Reuters, UBS’ Puerto Rico arm said it would contact investors to discuss alternatives.

“The firm will also reduce to zero the collateral value assigned to all Puerto Rico closed-end funds shares,” UBS wrote to investors.

Puerto Rico’s Governor Alejandro Garcia Padilla dropped a bombshell on holders of its $72 billion debt in June saying that he wants to restructure debt and postpone bond payments. The fiscal problems have investors and credit rating agencies fearful the island will default on payments and not reach an agreement with creditors by an Aug. 30 deadline.

The UBS funds, many of which were stuffed with UBS underwritten Puerto Rico debt, have been a source of ongoing legal headaches for the firm.

Reuters reported last June that the FBI was investigating allegations about UBS' sales practices that touted the funds' high yields and tax advantages.

A UBS spokesman declined to comment on the letter or the funds. Some funds with AAA-rated debt are exempt from the policy, UBS said in the letter.

The funds are not traded on exchanges and UBS sets their value.   Continued...

The waning moon is seen behind a logo of Swiss bank UBS in Zurich February 10, 2015. REUTERS/Arnd Wiegmann