A unit of UBS AG in the past two weeks has offered to repurchase shares of moribund closed-end municipal bond funds invested in Puerto Rican muni securities from a select number of clients.
The market for Puerto Rico's $70 billion muni debt bottomed out over the summer after Detroit filed for bankruptcy in July. UBS Financial Services Inc. of Puerto Rico is a significant player in the muni debt market on the island commonwealth, having packaged and sold $10 billion in proprietary closed-end bond funds through the end of last year.
The net asset value of the 14 UBS closed-end funds has plummeted.
The NAV for the $375 million Puerto Rico Fixed Income Fund Inc. was $3.63 at the end of October, down 85.4% since the end of June. The NAV for the $449 million Puerto Rico Fixed Income Fund III Inc. was $4.08 at the end of last month, a drop of 68.2% since June.
Investors purchased the proprietary bond funds for $10 a share.
When brokers called recently, the investors were given no firm price for the shares, attorneys said.
“Clients were told they could put an open order for NAV or less and sell it at whatever price they could get, 0, $1 or anything,” said Harold Vicente-Gonzalez, an attorney in Puerto Rico who has spoken with dozens of UBS clients invested in the muni bond funds.
Just three or four of those investors had been contacted by their brokers at UBS, and those clients all had open lines of credit with the bank, he said.
“These people are very skeptical,” Mr. Vicente-Gonzalez said.
“Their brokers haven't called in three months because they've been wiped out, and now they're getting calls," he said. "We haven't seen anything written down.”
UBS spokeswoman Karina Byrne confirmed the recent share repurchase program.
“We encouraged our financial advisers to contact clients who hold Puerto Rico closed-end funds, including clients who have UBS Bank USA loans secured in any part by closed-end funds, to discuss the share repurchase to help clients understand their options,” she wrote in an e-mail. “The offers would be at NAV or below.”
“It was simply a promise they may find a buyer for a client,” said Scott Silver, an attorney working with 75 UBS clients invested in the muni bond funds. “No price was discussed, and no specifics or guarantees given."