Friday, November 7, 2014

UBS PR Funds Also Bought $1.35 Billion of UBS Underwritten COFINA Bonds in 2007 and 2008

By Craig McCann, PhD, CFA and Edward O'Neal, PhD, CVA Versión en Español

Yesterday we showed that UBS underwrote $1.7 billion of unmarketable ERS bonds and bought them into the UBS PR Funds in 2008, available here. Today, we show similar conflicts led UBS to underwrite unmarketable 2007 and 2008 Puerto Rico Sales Tax Financing Corporation (COFINA) bonds and stuff them into the Funds. COFINA issued two series of bonds in 2007 and one Series in 2008.

COFINA 2007 Series A

UBS Investment Bank was 1 of 19 co-underwriters of the $2.7 billion Series A bonds targeting mainland investors. See Figure 1.

Figure 1 Cropped 1st Page of COFINA 2007 Series A Offering Circular (full document available here)

COFINA 2007 Series B

UBS Financial Services of Puerto Rico was the lead underwriter (with 11 co-underwriters) of the $1.33 billion Series B bonds sold only to Puerto Rican investors. See Figure 2.

Figure 2.Cropped 1st Page of COFINA 2007 Series B Offering Circular (full document available here)

We don’t know how much of the COFINA 2007 Series B bonds UBS committed to sell but we do know UBS purchased $614 million or 46% of the $1.330 billion COFINA 2007 Series B bonds into its proprietary funds. See Figure 3.


Figure 3. UBS Purchased $614 million of COFINA 2007 Series B Bonds for Its Funds
 
COFINA 2008 Series A

In 2008, UBS Financial Services of Puerto Rico was the sole underwriter of the $737 million Series B bonds sold only to Puerto Rican investors. None of the other 18 underwriters of the 2007 Series A or of the other 11 underwriters of the 2007 Series B COFINA bonds participated in the 2008 Series B COFINA bonds. See Figure 4.

Figure 4. Cropped 1st Page of COFINA 2008 Series A Offering Circular (full document available here)

UBS purchased 100% of the $737 million COFINA 2008 Series A bonds into its proprietary funds. See Figure 5.

Figure 5. UBS Purchased $735 million of COFINA 2008 Series A Bonds for Its Funds

As with the ERS bonds, UBS bought the COFINA bonds it underwrote in 2007 and 2008, making room for these bonds by selling other portfolio holdings. There was no other market for the COFINA 2008 Series A bonds or UBS used its control of its proprietary funds to maximize its fees from underwriting and selling the 2008 COFINA Series A bonds.

We’ve written extensively about the UBS Puerto Rican Municipal Bond Funds. You can find our earlier blog posts here. In a December 2013 post here we wrote of the conflicts of interest first identified by David Evans of Bloomberg (David Evans, UBS in Puerto Rico Pension Gets Fee Bonanza Seen as Conflicted, February 27, 2009, Bloomberg) which led UBS to stuff the Retirement System Bonds into UBS’s Funds.


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