The Securities Litigation Expert Blog

Accelerant Publishes Puerto Rico Municipal Bond Crisis White Paper

Posted by Jack Duval

Feb 7, 2014 7:20:30 AM

This post continues our expert coverage of the Puerto Rico municipal bond crisis.

Accelerant is pleased to announce the publishing of a new white paper entitled:  "The Puerto Rico Municipal Bond Crisis:  What took you so long?"  The paper is co-authored by analyst Jay Dulski, fixed income expert Gerry Guild, and CEO Jack Duval, and can be accessed here.

Paper sections include:

  • The Puerto Rico Economy from 2006 to 2013
  • Understinding Puerto Rico Municipal Bonds
  • Municipal Bond Funds
  • The Effect of Combining Internal Fund and Account Leverage: 1 + 1  = 4
  • Appendicies of Tax Tables, Historical Bond Ratings, and Credit Ratings Scales
  • Links to News Articles and Data Sources

 

__________

For information about Accelerant municipal bond and closed-end fund experts, click here.

 Get Updates on the Puerto Rico Municipal Bond Crisis

 

Read More

Topics: municipal bond crisis, closed-end funds, Puerto Rico, UBS, litigation, white paper, investments, securities litigation

S & P Puerto Rico Credit Ratings Downgrade Call Notes

Posted by Jack Duval

Feb 5, 2014 1:19:04 PM

This post continues our expert coverage of the Puerto Rico municipal bond crisis.

Accelerant analyst Jay Dulski has summarized the Standard and Poor's conference call announcing the downgrade of Puerto Rico debt ratings.

On February 4, 2014 Standard and Poor’s made the following downgrades:

  • GOs downgraded to BB+ from BBB-
  • Commonwealth appropriation secured debt downgraded to BB
  • Employee Retirement System (“ERS”) debt downgraded to BB
  • Highways and Transportation Authority (“HTA”) bonds downgraded to BB+
  • GDB long-term issuer rating downgraded to BB from BBB-
  • GDB short-term issuer rating downgraded to B from A-3

Ratings of Puerto Rico Sales Tax Finance Corporation (“COFINA”) bonds remain unchanged.  All ratings except COFINA are on a negative CreditWatch, however COFINA has a negative outlook.

See the February 4, 2014 S&P releases below:

Puerto Rico GO Rating Lowered to 'BB+'; Remains on Watch Negative

Research Update: Government Development Bank for Puerto Rico Downgraded to 'BB/B' from 'BBB-/A-3'; Ratings Remain on CreditWatch Negative

On January 28, 2014, in hindsight quite a coincidence, S&P Dow Jones Indices announced their February 2014 rebalancing of the S&P National AMT-Free Municipal Bond Index.  Citing a methodology change, all U.S. territories were removed from the index, which had contained extensive Puerto Rico holdings.  The change took effect after the close of business on Friday, January 31, 2014.  The full index announcement may be found below.

February Rebalancing Results for S&P National AMT-Free Municipal Bond Index Announced by S&P Dow Jones Indices

 At 4:00pm EST on February 4, 2014, S&P hosted a webcast regarding the downgrades.  The following notes are highlights, and a link to the full webcast may be found below.           

Rating Actions on the Commonwealth of Puerto Rico and the Government Development Bank

Webcast: Ratings Actions on the Commonwealth of Puerto Rico and the Government Development Bank

February 4, 2014

Speakers included but were not limited to:

  • Horacio Aldrete-Sanchez, Managing Director, Finance Ratings Standard & Poor’s Ratings Services
  • David Hitchcock, Senior Director, Public Finance Ratings Standard & Poor’s Ratings Services
  • Sunsierre Newsome, Associate Director, Financial Institutions Ratings Standard & Poor’s Ratings Services

 

-The downgrade reflects the GDB’s ability to provide near term liquidity to the Commonwealth

-The GDB is also on CreditWatch, which S&P expects to be addressed after the downgrade

-S&P expects the downgrade to cost Puerto Rico $940 million in debt accelerations and swap collateral postings

-In any future decisions, S&P will examine the recapitalization of the GDB, which may include a bond sale

-The GDB downgrades reflect S&P’s opinion that the liquidity position has weakened and the deterioration of the Commonwealth’s creditworthiness has hurt GDB’s business position and heightened the risk of their heavy loan portfolio concentration

-Since the GDB may not borrow from the central bank, the ratings reflect S&P’s opinion that the GDB cannot fund the Commonwealth’s liquidity without accessing the markets

-S&P expects that the GDB or the Commonwealth will seek to access the market in the near future

-A $1 billion debt placement by the GDB or the Commonwealth would be viewed as a stabilizing factor by S&P

-The funding and liquidity of the GDB “is not in line with an investment grade rating”

-The ratings also reflect that the GDB operates within a single market and is exposed to significant concentration risk

-S&P views the health of the Commonwealth as important to the GDB and recognizes that the two are closely tied

-The deterioration in the health of the Commonwealth’s financial situation may negatively affect payments for the GDB due to asset concentration in government affiliated entities

-The GDB’s deposits are down while loans up, posting a very high 160% loan to deposit ratio

-Asset quality at the GDB has deteriorated with a significant rise in non-performing assets (“NPAs”)

Question and Answer Session

If Puerto Rico cannot fix their cash flows, how far down would the rating go?

-The credit rating does assume that they will be able to raise additional funding by the end of February

-The CreditWatch reflects the risks that they may not raise significant additional capital

-S&P will continue to evaluate the situation

-For now, at BB+ S&P believes they have adequate liquidity, but they will need to raise additional capital between now and the end of the fiscal year

Regarding the status of rum bonds

-Rum bonds (based on excise taxes) and HTA bonds were taken down to the same rating as GOs because of Article 6 of the Puerto Rican Constitution, which grants priority payment to the GOs 

-This diversion to GOs makes the ratings equal, even though their natural ratings may be higher than the GOs

Regarding the impact on COFINAs

-No rating action was taken on COFINAs

-The outlook was changed to a negative outlook a few months ago to reflect economic weakness

-S&P has legal opinions that the GO diversion does not affect COFINA, as it is simply a gross revenue pledge, so no rating action has been taken on COFINA

-COFINA is not currently under review unless there is new information, but nothing is currently pending

Would a yield above 10% represent a lack of market access?

-Market access is an important component of liquidity evaluations

-The question is whether Puerto Rico will be able to bridge the period to budget balance

-Puerto Rico recently announced a balanced budget for FY 2015, which would be the first time in many years

-Such a development could represent some credit improvement

-For now S&P believes that in the near term there are significant liquidity and implementation risks

Regarding the effect on bond insurers

-The rating action does not affect either Assured or National Public Finance (“NPF”) with respect to capital adequacy or financial strength ratings

-S&P believes their capital and liquidity are strong and can absorb higher theoretical losses

-Assured and NPF Each have $5 billion of exposure to various Puerto Rico outstanding obligations

What impact will the Commonwealth’s liquidity issues have on the island’s local banks?

-Depending on legislation, there may be a transfer of public deposits from local banks to the GDB

-S&P does not expect any material effect on banks, since they will still have private deposits and broker deposits

Since a bond offering is expected, why downgrade ahead of GDB?

-S&P will keep the BB+ rating even in the event of a sizeable bond issue in the near term

-S&P had the information and wanted to share it with market

-Again, the bond issue could resolve the CreditWatch, but also could demonstrate some market access risks

-Again, without market access, the rating could be below BB+

-The bond issue will not change the rating, but may resolve CreditWatch

-S&P had expected an issuance in the fall which did not happen, and thus believes that access has been constrained

What is the next step, what can the government do, how long will it take?

-S&P is not prescriptive, only an observer, and has made no suggestions as to what to do

-S&P is rigidly bound by their published criteria
-Short term resolution of liquidity issues could take Puerto Rico off CreditWatch, and if the attempt to balance the budget overcomes implementation risks, that could improve the credit rating

-There have been very significant budget and pension reforms by the Padilla administration, but there other credit factors outside of executive management, such as macroeconomic and market access headwinds

What extent does the coupon level or size of the deal affect CreditWatch status?  What’s affordable for the Commonwealth?

-S&P will have to look at the impact on the general fund

-There have been significant deficit cutting efforts and there are prospects for more, which represent long term positive credit factors

Any additional details about the GDB’s asset quality?

-High concentration to the Commonwealth

-NPAs have more than doubled over last few years

-Entities that are non-performing are government related entities that have been struggling

-NPAs ~3% in 2011, FY 2012 at more than 6%

Will the GDB have enough liquidity?

-S&P believes that the GDB will have a limited ability to fund liquidity needs for the government in coming quarters

-But again, failure to access markets in coming quarters would be “very difficult”

-The first concern is concentration in the Commonwealth and government entities

-To be clear, S&P views the GDB as well capitalized, but very concentrated

-S&P is not saying the GDB has problems of big losses, but rather is noting the GDB’s concentration in incrementally deteriorating entities

Comment on the 1-notch difference between GOs and the GDB

-S&P applies government related entity criteria in addition to the stand alone profile of the GDB

-S&P does not feel that Puerto Rico has significant liquidity except through the GDB at this point

Does  the current rating assume the teachers’ pension reform will stick?

-The current rating does assume that the teachers’ pension reform, currently in court, will stick

-S&P believes that the issues are very similar to the ERS reforms which the court upheld

-Also, reforms do not go into effect until the beginning of 2015, but a court decision is expected within a few weeks

-If it is ruled invalid S&P expects legislative tinkering, but the rating incorporates an expectation that it will be upheld

What would have to happen to be concerned about bond insurers?

-Last week S&P published a commentary with a stress scenario if Puerto Rico obligations go to single B, and in that scenario both Assured and NPF maintained capital adequacy cushions well above the requirements for their current ratings

-Since we did not get there today, S&P is very comfortable with their ratings and their liquidity positions.

Bond Insurers’ Capital Adequacy is Sufficient to Handle Potential Credit Deterioration in Puerto Rico

What impact will this have on Puerto Rico local banks? [second time this was asked]

-OFG Bancorp (Oriental Bank and Trust) is on CreditWatch with a negative outlook

-Have not stated a resolution timeframe, but did say that S&P could lower the rating on OFG if:

they expect loan performance to weaken materially;

capital is no longer viewed as strong;

the rating on the Commonwealth is lowered;

-No more than a 1-notch downgrade at the bank and a 2-notch downgrade at the holding company are expected

-Other banks’ outlooks include:

Firstbank of Puerto Rico (negative outlook)

Banco Santander Puerto Rico (negative outlook)

Doral Bank (negative outlook)

Banco Popular (stable outlook)

What economic growth forecast are we expecting in the rating?

-S&P does not make an independent forecast but does look at others

-The outlook is for economic weakness, and forecasts are not anticipating any major growth

-The Puerto Rico planning board will issue a new forecast for next fiscal year shortly

-S&P expects to see more of the same

-S&P does feel that the government is taking steps to grow business, including finding native substitutes for agricultural imports

-Problems remain, really since 2006 and the Section 936 phase out, and the economic environment is “very difficult”

 Are any resources available from the U.S. federal government for liquidity?

-S&P does not expect support from the federal government

-The current rating does not include any expectation of a federal bailout

__________

For information about Accelerant municipal bond experts, click here.

 Get Updates on the Puerto Rico Municipal Bond Crisis

 

Read More

Topics: municipal bond crisis, closed-end funds, Puerto Rico, UBS, litigation, investments, securities litigation

Puerto Rico Debt Crisis Conference Notes

Posted by Jack Duval

Jan 24, 2014 10:20:50 AM

This post continues our expert coverage of the Puerto Rico municipal bond crisis.

On January 15, 2014, Jay Dulski (Analyst) and Gerry Guild (Senior Consultant), co-authors of our forthcoming Puerto Rico whitepaper, attended a conference on Puerto Rico municipal debt organized by the Global Interdependence Center and hosted at the New York Athletic Club in New York City.  Below are some of the highlights.  The conference was very informative and included many esteemed speakers from within the municipal bond industry, and covered many topics including economic, market, and political trends.

For complete video of the conference and viewable presentations of the speakers, please visit the GIC’s website:

http://www.interdependence.org/resource/

 

Tom Tzitzouris, Vice President and Fixed Income Strategist, Strategas Research Partners

  •        Puerto Rico burst onto everyone’s radar largely due to the Detroit bankruptcy and the Chicago downgrade
  •        The US Federal Reserve’s actions are causing the spreads to diverge between US and PR bonds
  •        Puerto Rico is large enough to be disruptive to the US and global recoveries
  •        Since the danger of 3Q2013 has passed, Puerto Rico still matters but the risk of a catastrophe has decreased
  •        Just as the EU benefitted from quarantining and delaying the Greek default scenario, so may the US benefit from delaying and quarantining Puerto Rico’s problems

o   Notably the resulting austerity has been very painful for the Greeks themselves and their bondholders, but isolated from the rest of the EU

 

Donald Rissmiller, Founding Partner of Strategas Research Partners

  •        As we discuss in our forthcoming paper, Puerto Rico is suffering from a dismal Labor Force Participation Rate of near 40%
  •        The problem with the LFPR is that it is very sticky, meaning it takes a long time to go down and a long time to go up, and there are relatively few policy tools which are able to influence it

o   A low LFPR means fewer workers paying taxes and more dependents

  •        PR revenue collections are up so far for FY 2014, and the emergency climate has calmed since 3Q2013
  •        Other demographic issues confronting Puerto Rico include population loss and high crime.  High public debt and high crime rates tend to be correlated, and represent a terrible combination for a country.

o   “Puerto Ricans Flock North Away from Battered Economy,” Campo-Flores, Arian, WSJ 1/6/14

o   “Plagued by Violence, Bad Economy, Puerto Rico Rings in 2014 with a Bang; 13 murders in 5 days,” O’Reilly, Andrew, FoxNEWS Latino, 1/8/14

 

Natalie Cohen, Managing Director and Head of Municipal Research, Wells Fargo

  •        Puerto Rican pension reform is continuing, and meeting strong resistance

o   The reforms regarding the PRGERS pension fund (government employees) were upheld in a 5-4 split decision by the PR Supreme Court

o   Reforms passed in December 2013 regarding the PRTRS pension fund (teachers) are currently in court, halted temporarily by a January 15, 2014 decision amidst a two day strike organized by the teachers union.  Governor Padilla called the decision “dangerous.”  Reuters.

o   A separate legal challenge has been filed regarding the PRJRS pension fund (Judiciary

  •        A complicating factor is that PRGERS members contribute to US Social Security, whereas the other systems do not
  •        Ms. Cohen discussed that the pension funds count member loans and balance sheet receivables, and they are not true earning assets.  This potentially overstates the strength of the balance sheets.

o   PRGERS outstanding member loans: $760 mil (June 2013)

o   PRTRS outstanding member loans: $411 mil (June 2013)

 

Jospeh Engelhard, Senior Vice President, Capital Alpha Partners

  •        US can help PR by reforming rum tax, and granting tax credits to US companies for PR excise taxes
  •        In 2012, US provided approximately 21% of PR economy

 

Q&A

  •        Rissmiller: Underground economy in PR is significant, maybe $14 billion
  •        Engelhard: “Section 936 is never coming back.”
  •        Engelhard regarding the Jones Act (following a question asked by Jay Dulski)
    • Always on PR’s wish list, but absent a crisis change is highly unlikely at this point

 

Joseph Mysak, Editor of "Municipal Market"

  •        70% of mutual funds own PR debt due to the triple tax exemption
  •        of 565 open end funds tracked by Morningstar, 395 are exposed to PR
  •        Noted the change in the investor profile in the last decade or so due to dilution
  •        No longer is it “mom and pop” losing their retirement, but rather large institutional investors with huge pools of cash
  •        According to Morningstar, most prospectuses limit the purchase of junk bonds, but not holdings of junk bonds if they are downgraded later.  Accordingly, market reaction to a downgrade may be muted
    • 7 and 8 rate handles are probably accurately reflecting market risk

 

John Mousseau, Executive Vice President and the Director of Fixed Income at Cumberland Advisors

  •        Refer to John’s presentation for some very informative market charts
  •        We may see see some kind of taxable PR debt deal floated to expand buyer universe
  •        Headline risk is likely contributing to overreaction

 

Robert Kurtter, Managing Director for U.S. State and Regional Ratings, Moody's Investors Service

  •        Green shoots in PR economy, but still negative trends, especially weaking manufacturing and population loss/brain drain
  •        Noted the potential problem of “Scoop and Toss,” using new issues to pay old ones and throw them deeper into the capital structure
  •        Noted that the PRGERS is a closed system now, but still has to get through a very difficult 20 years under significant operating pressures
  •        Referred to Puerto Rico as a “much more third world kind of economy” than is usually associated with a US territory
  •        An interesting note regarding the constitutional protections on interest payments in Puerto Rico:
    • COFINA (revenue) bonds have not been tested in court as to whether they are exempt from the constitutional 1st lien obligation
  •        Unlike EU countries, PR is not subject to huge rollover risks, however its finances are much narrower and more constrained

 

David Hitchcock, Senior Director in Standard and Poor’s State Group

  •        Manufacturing in PR is about 40% GDP but only 9% of employment
  •        Stated that real progress is being made in PR, but obviously they are not out of the woods yet, thus the BBB- rating as of March 2013
  •        Liquidity concerns are not immediate due to actions by GDB (PR Development Bank)
  •        Water authority is now self-supporting through rate increases
  •        General Obligation claw back provisions do not apply to PREPA or PRASA (utility bonds)

For information about Accelerant municipal bond experts, click here.

 Get Updates on the Puerto Rico Municipal Bond Crisis

 

Read More

Topics: municipal bond crisis, closed-end funds, Puerto Rico, UBS, litigation, investments, securities litigation

Puerto Rico Municipal Bond Crisis - Adverse Tax and Trade Policies

Posted by Jack Duval

Nov 19, 2013 4:17:06 AM

Our expert analysis of the Puerto Rico municipal bond crisis continues with an examination of tax and trade policies that have negatively affected the island economy.  In particular, the timing of the expiration of Section 936 coincided with the start of the 2006 recession.

The Puerto Rico economy has been adversely affected by a number of changes in tax and trade policy.  Repealed by President Clinton in 1996 with a ten year phase out, Section 936 of the Federal Tax Code expired in 2006, helping to thrust the island economy into its long-run recession.  Section 936 was a tax incentive for U.S. companies to manufacture in Puerto Rico, allowing the repatriation of profits to the mainland U.S. without paying federal tax.  The pharmaceutical industry was a large beneficiary of this tax break and was a major driver of employment on the island.  According to a 2002 article published by the Pharmaceutical Industry Association of Puerto Rico, the pharmaceutical sector was responsible for 56% of total manufacturing jobs and 20% of total industrial jobs on the island.  The article states that although the pharmaceutical industry was able to largely maintain its tax advantages as an existing industry on the island, the expiry of the exemption was a significant disincentive for new industries to move to Puerto Rico.  27,373 industrial jobs were lost from October 1996 to September 2002.[1]  Additionally, included below is a reference table of historical Puerto Rican tax rates.



[1]                 Maldonado, A. W., “The Loss of 936: Good or Bad for Puerto Rico?” The Pharmaceutical Industry Association of Puerto Rico, November 17, 2002

 


Read More

Topics: fixed income experts, Puerto Rico Municipal Bond Crisis, UBS, closed-end bond funds, litigation, investments, fixed income

Puerto Rico Municipal Bond Crisis - Unfunded Pension Fund Data

Posted by Jack Duval

Nov 16, 2013 3:17:01 PM

As part of our continuing analysis of the Puerto Rico municipal bond crisis, we have compiled data on the three pension plans funded by the Commonwealth of Puerto Rico.  The trend is clear at a glance - these pension funds have been chronically underfunded since at least 2000 and are headed for insolvency in the next year or two.

For our previous discussion of the Puerto Rico pension system, see this.

For a higher resolution version of this chart:  Puerto Rico Municipal Bond Crisis - Unfunded Pensions.

Read More

Topics: Puerto Rico Municipal Bond Crisis, unfunded pension, litigation, investments, fixed income, municipal bond expert, UBS closed-end funds

Accelerant Insurance Expert John Duval, Sr. Quoted in MarketWatch Article

Posted by Jack Duval

Nov 16, 2013 5:22:07 AM

Variable annuity expert John Duval, Sr. was quoted in a recent MarketWatch article about the suitability of variable annuities for retirees.  (MarketWatch)  Duval, Sr. was quoted a number of times about the tax aspects of variable annuity investing, including:

Variable annuities only offer ordinary income, no capital gains opportunities, ever... High net worth investors and variable annuities trigger double taxation at death, he said. In fact, the beneficiaries get 1099s for the gains.

The article was written by Robert Powell, a MarketWatch Retirement columnist.
Read More

Topics: variable annuity taxation, variable annuity expert, insurance, Senior Investors, investments, variable annuity litigation, John Duval Sr.

Accelerant Arbitration Market Indicator Flashes Highest Sell Signal Since 2000

Posted by Jack Duval

Nov 13, 2013 8:38:39 AM

The Accelerant Arbitration Market Indicator printed at 1.42, the highest since 2000.  

Two quick take-aways:


  1. For securities litigators: the lull in filings is probably in the ninth inning;

  2. For investors:  Caveat emptor.


You can also link to the visualization (which also has a comparison of the FINRA arbitration filings and the S&P 500) here.

 

Read More

Topics: FINRA, Statistics, Data Analysis, litigation, investments, analytics, Accelerant Arbitration Market Indicator, FINRA Arbitration, Law Firm Analytics, Predictive Analytics

Puerto Rico Municipal Bond Crisis - Unfunded Pension Funds

Posted by Jack Duval

Nov 12, 2013 3:56:18 AM

In our continued expert analysis of the Puerto Rico municipal bond crisis, we are looking at the unfunded pension plans of the Commonwealth.

Background

When the ratio of workers to retirees falls, state pension systems become strained.  If the trend continues, the pension system becomes unsustainable.  In a healthy pension, the support structure can be visualized as a pyramid, with many contributors at the base supporting few pensioners at the top.  However, as the large base of contributors ages there can be fewer contributors to fund the pension, especially if population growth stalls and life expectancies increase.

If this occurs, the structure of the pension system shifts from a pyramid to a diamond to an inverted pyramid.   Once inverted, there are few workers supporting many pensioners and the pension is on a crash course with math.  Funds are being drawn down at an accelerating rate and being replaced at a declining rate.

Unfunded pensions systems are a significant risk to an economy because investment and savings are diverted for wealth transfers to pensioners.  This dampens long-term growth and can open the door to social unrest as both contributors and pensioners view the pension system as unfair.

Puerto Rico Pension Plans

As could be expected from the trend of declining population, the Puerto Rico pension system is chronically underfunded.  There are five main public pension systems in Puerto Rico.  They include:


  • Puerto Rico Government Employees Retirement System (“PRGERS”);

  • Puerto Rico Judiciary Retirement System (“PRJRS”);

  • Puerto Rico Teachers Retirement System (“PRTRS”);

  • Retirement System of the University of Puerto Rico (the “University Retirement System”);

  • Employees Retirement System of the Puerto Rico Electric Power Authority (“PREPA”).


The University Retirement System and PREPA are funded independently by the revenues of their respective corporations, the remaining plans are funded by the Commonwealth.  We examine the three Commonwealth plans below.

The three Commonwealth administered plans are shockingly underfunded.  In total, they have plunged from a 24.8% funded ratio in 2007 to only 8.4% in 2012.  For comparison, the U.S. state of Illinois is considered the worst funded pension system among all of the states; its system was reportedly funded at 43% in February 2013[1].  In isolation, the PRGERS (the largest system of the three with approximately 200,000 current and retired workers[2]) is the worst, showing a $26.4 billion unfunded accrued actuarial liability (“UAAL”) as of June 30, 2012 (the most recent valuation date) and only a 4.5% funded ratio.  The

PRJRS and PRTRS are funded at 14.1% and 17.0% as of June 30, 2012 respectively.  As is clearly demonstrated in the exhibit, all three pension systems are quickly approaching insolvency, and their fates have only been worsening as they consume current assets to feed current obligations.[3]

It should be noted that Governor Padilla signed into law a series of reforms affecting the PRGERS in April 2013.  These included raising the retirement age for some workers to 65, increasing pension contributions by almost 2%, and lowering monthly pensions and benefits for some state workers.  In addition, state workers’ Christmas bonuses were reduced and summer bonuses were eliminated.[4]  Encouraging as these reforms are, however, it remains to be seen whether they will be enough to counteract long building and deep structural imbalances.



[1]                 All details on the Puerto Rico pension plans were taken directly from their respective actuarial valuations.  See the Reference Section for details.


[2]                 “Puerto Rico Senators Approve Public Pension System Overhaul,” Id.




[3]                 Kaske, Michelle, “Puerto Rico Set to Boost Worst Funded Pensions Sans Debt,” Bloomberg,  February 22, 2013


[4]                 Anonymous, “Puerto Rico Senators Approve Public Pension System Overhaul,” Reuters, April 4, 2013,

 


Read More

Topics: municipal bond crisis, CEF, Puerto Rico, UBS, unfunded pension, litigation, investments, fixed income, expert opinion

Sustainable Withdrawal Rates - Revisited

Posted by Jack Duval

Nov 11, 2013 4:02:16 AM

William Bengen, the financial advisor who created one of the most heavily cited studies on sustainable withdrawal rates, is backing off his previous findings.  (Barron's)  Bengen's 1994 study (Journal of Financial Planning) concluded that a portfolio balanced 50/50 (stocks/bonds) could sustain a four percent withdrawal rate though almost all market scenarios.  (Importantly, Bengen's analysis assumed the four percent was set off of the initial premium amount and then was adjusted each year for inflation.)

Bengen's hedging should be obvious to anyone in the financial planning business.  Yields on stocks have fallen and yields on bonds have plummeted, making it very difficult to create the required returns without capital appreciation.  This simple fact requires advisors and investors to make a difficult decision:  settle for lower withdrawal rates, or take more risk.

From the big moves in junk bonds, master limited partnerships, and other high-risk investments, it appears that many advisors and their clients have opted to take more risk.

As many have warned, this has usually ended badly.  See here, here, and here for our previous discussion of yield chasing.

Read More

Topics: yield chasing, sustainable withdrawal rates, investments, risk, fixed income

Puerto Rico Municipal Bond Crisis Research - Labor Force and Unemployment

Posted by Jack Duval

Nov 10, 2013 11:17:34 AM

Two trends are creating significant headwinds for the Puerto Rico economy:


  • A declining labor force;

  • Persistent and/or rising unemployment


These trends are clear in the chart below.  For a high resolution version of the chart, click: Puerto Rico Labor Force and Unemployment.

 

Read More

Topics: municipal bond crisis, closed-end funds, Puerto Rico, UBS, litigation, investments, securities litigation

Subscribe to Email Updates

Recent Posts

Posts by Topic

see all