Bloomberg reported yesterday afternoon that Puerto Rico’s sales tax bonds, known as Cofinas, are being cut from stable to negative.  This decision by S&P is purportedly based on Puerto Rico’s economy outlook and not concerns regarding leverage.  Although this basis may be acceptable for a macroeconomic analysis of Puerto Rican bonds,  our concern for individual investors is based in great part on our concerns regarding leverage. Specifically, our law firm is concerned about leverage within bond funds holding heavy concentrations of Puerto Rican debt and, in some egregious cases, the recommendation by certain financial institutions and financial advisors that their clients use margin to buy more of these leveraged funds. In other words, some Wall Street Funds and Latin American Banks were actually recommending that their own client borrow money to buy bond funds in which the money manager was already borrowing money to buy more bonds. This resulted in portfolios with leverage on steroids and converted bond funds from fixed income options, into speculative bets involving arbitrage and the carry trade.

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