Tuesday, November 4, 2014

UBS Stuffed $2.5 Billion of ERS and COFINA Bonds it Underwrote in Its Puerto Rican Funds in 2007 and 2008

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

We’ve written extensively about the UBS Puerto Rican Municipal Bond Funds. You can find our earlier blog posts here. In a January 2014 blog post available here, we pointed out that the losses suffered by investors in the UBS PR Funds were caused by the portfolios’ high leverage and concentration in Employee Retirement System and Sales Tax Authority (COFINA) bonds. 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.

In a series of blog posts this week and next week we’ll document UBS’s conversion of its Funds’ portfolios in 2008. As we’ll explain Wednesday, UBS underwrote unmarketable Employee Retirement System bonds and bought these conflicted bonds into the UBS Funds in 2008. On Friday, we’ll show the same conflicts led UBS to underwrite unmarketable 2008 COFINA bonds and then stuff them into the UBS Funds. Next week we’ll further develop the harm to investors UBS caused by stuffing the conflicted ERS and COFINA bonds into its Funds.

Figure 1 and Figure 2 illustrate how UBS dramatically changed the UBS Puerto Rico Funds in late 2007 and early 2008 using the Tax Free Puerto Rico Fund II and Puerto Rico Fixed Income Fund II as examples. UBS sold off $350 million other bonds and bought $530 million of ERS and COFINA bonds it underwrote in these two funds alone.

Figure 1 summarizes the market value of Tax Free Puerto Rico Fund II holdings by issuer on June 30, 2007 (from 2nd Quarter 2007 Quarterly Review available here), November 30, 2007 (from the Annual Report available here) and on November 30, 2008 (from the Annual Report available here).

Figure 1. Tax Free Puerto Rico Fund II Holdings by Issuer Category
The Tax Free Puerto Rico Fund II held no COFINA bonds on June 30, 2007. UBS participated in COFINA underwritings on July 13, 2007 (COFINA Series 2007A Offering Circular available here) and on July 18, 2007 (COFINA Series 2007B Offering Circular available here). We don’t currently have the 3rd Quarter 2007 Quarterly Review but the November 30, 2007 Annual Report shows the Tax Free Puerto Rico Fund II Fund then owned $93.4 million of COFINA bonds. UBS was the sole underwriter of the (COFINA Series 2008A Offering Circular available here.)

The Tax Free Puerto Rico Fund II held no ERS bonds on November 30, 2007. UBS participated in underwriting three series of ERS bonds in 2008. The Series 2008A Offering Circular is available here, the Series 2008B Offering Circular is available here and the Series 2008C Offering Circular is available here.

Between June 30, 2007 and November 30, 2008 UBS caused the Tax Free Puerto Rico Fund II to pay $188,943,300 for the ERS and COFINA bonds and these two issuers’ bonds went from 0% of the Tax Free Puerto Rico Fund II portfolio to 50% of the gross assets and 98% of the net assets of the Fund. UBS sold roughly $190 million of other issuers’ bonds out of the Tax Free Puerto Rico Fund II to make room for the ERS and COFINA bonds it was underwriting.

Figure 2 presents holdings by issuer for the Puerto Rico Fixed Income Fund II on June 30, 2007 (from Quarterly Review available here), November 30, 2007 (from the Annual Report available here) and on November 30, 2008 (from the Annual Report available here).

Figure 2. Puerto Rico Fixed Income Fund II Holdings by Issuer Category


The Puerto Rico Fixed Income Fund II held no COFINA or ERS bonds on June 30, 2007. Between June 30, 2007 and November 30, 2008 UBS caused the Puerto Rico Fixed Income Fund II to pay $340,357,374 for the ERS and COFINA bonds and these two issuers’ bonds the ERS and COFINA bonds went from 0% of the Puerto Rico Fixed Income Fund II portfolio to 44% of the gross assets and 88% of the net assets of the Fund. UBS sold roughly $335 million of other issuers’ bonds out of the Puerto Rico Fixed Income Fund II to make room for the ERS and COFINA bonds it was underwriting.

 

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