Puerto Rico Electric Power Authority (Prepa) recently negotiated with Citibank and Scotiabank for a seven-and-a-half month extension of $671 million in credit lines. The extensions will ensure that Prepa can buy oil that is necessary to keep the Puerto Rican electricity provider operating. In return for the extension, Prepa must appoint a chief restructuring officer and provide a restructuring plan in March 2015. As Prepa and other Puerto Rico government entities have faced financial trouble amid speculation of possible default, many investors in Puerto Rico debt have suffered billions of dollars in losses. At the same time, investors in many leveraged UBS Puerto Rico bond funds have seen the value of their investments drop by more than 50%.

Moody’s and Standard & Poor’s have lowered Puerto Rico’s credit rating to junk bond status as concerns increase about Puerto Rico’s ability to meet its financial obligations. Prepa reportedly has borrowed approximately $9 billion and has had more liabilities than assets since 2011. Of course, operating at a deficit has to end at some point. Prepa now is at the mercy of its lenders. It either will have to conduct massive restructuring and cost cutting or engage in rolling power outages.

Prepa’s financial problems are similar to those of many other Puerto Rico government entities. For example, Puerto Rico’s government pension funds are severely underfunded and many other government agencies face similar questions about their ability to service their debt. While some hedge funds have begun investing heavily in Puerto Rico real estate, hoping for a financial turnaround, if Puerto Rico’s financial problems continue to grow, investors in Puerto Rico bonds or leveraged UBS Puerto Rico closed-end bond funds could see even more investment losses. Investors may be able to file a FINRA arbitration claim to recover their losses. DKR currently represents approximately 100 individual and institutional investors with such claims.

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