Puerto Rico Bonds Tumble On Possible Hedge Fund Pump-And-Dump Probe

Tyler Durden's picture

In what many thought was a miracle of modern money-printing-driven yield-chasing, Puerto Rico managed to get $3.5 billion of bonds off last week with no problem (albeit at a 8.73% yield). The issue (while perhaps not as surprising as the low yield issues of Uganda we have reflected on previously) raised some eyebrows and in the trading since its release, FINRA noticed something concerning.  The bonds, as Bloomberg reports, are supposed to 'minimum denomination $100,000' blocks and yet 75 trades this week have been for no more than $25,000 violating regulations which deem these for "institutional purchasers" and strongly suggesting the heavy hedge fund demand was nothing more than a pump-and-dump scheme to unsophisticated retail investors. PR bonds have plunged from par to $92 this week.





Puerto Rico borrowed $3.5 billion at 8.73% yield maturing in 2035 - funding itself through June 2015 and staving off imminent default risk with the biggest ever high-yield muni offering! As Bloomberg notes,

Hedge funds made up the majority of buyers in the tax-exempt deal, according to David Chafey, chairman of the island’s Government Development Bank.


Sale documents stipulate that “the bonds shall be issued in the minimum denomination of $100,000 and any integral multiple of $5,000 in excess thereof,” unless one of the three largest rating companies raise Puerto Rico to investment grade.

However, once the bonds were free to trade March 11, things changed...

Since then, they changed hands in at least 75 transactions less than $100,000, data compiled by Bloomberg show. The bonds’ highest price, 100 cents on the dollar, was for a $25,000 trade at 10:47 a.m. in New York on March 12.

This is a problem that FINRA is looking into...

Trades below the minimum amount for investors that don’t already own at least $100,000 of the debt violate the Municipal Securities Rulemaking Board’s Rule G-15 subsection F, said Martha Haines.


The rule Haines referenced states that brokers and dealers can’t execute a trade of a municipal security that’s below the minimum denomination of the issue, according to the MSRB’s website.


“These are intended for institutional purchasers, or at least for people that can afford the risk by making it a minimum denomination of $100,000,” said Haines, who teaches municipal finance at the Maurer School of Law at Indiana University in Bloomington.

A glance at the chart shows both the illiquidity in the market (huge bid-offers) and the major drop on Friday as FINRA unveiled its probe (suggesting those wanting to get rid - hoping to find greater fools - dumped them fast).


Given the commonwealth’s challenges, the debt should be held by investors who are aware of the possibility of default, said Sean Carney, a municipal strategist for New York-based BlackRock Inc., the world’s largest asset manager.


"It’s irresponsible,” Carney said about trades below $100,000. “It’s not what the deal was meant to do -- to keep the risk with those who understand it.” 

Of course, this could be merely splitting across accounts (or smal lupsizing from already $100,000 accounts) and all be a big misunderstanding... you decide which is more likely.

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One And Only's picture

Time for a bailout of Puerto Rico.

max2205's picture

Rules? Since when do rules ever apply?

kaiserhoff's picture

Bruce Krasting said these would trade at a huge premium, and the Boyz handling this would make a fortune.

Looks like the new normal has whiskers.  I'm starting to like the taper, pathetic and shallow as it is.  It points to the carnage ahead.

Buck Johnson's picture

I can't believe they even considered to float a bond of any value to Puerto Rico, they are about to default and it looks now that it was true. 

jeff montanye's picture

apparently the real play was in the old pr bonds which this issue makes more secure.

Renewable Life's picture

Whaaaaaaaat, corruption in the PR, nooooooo way???? That's like saying, your shocked at the killing and violence in Mexico!

bunnyswanson's picture

Remember Karen Hudes?  The World Bank Whistle blower?  Well, her husband has been working diligently to ensure that Puerto Ricans will be without a country (Land in exchange for their debt).


"Barry Spergel attended Yale Law School 1975-1978, which Karen Hudes also attended, and it is presumed that is where they first met and subsequently he became Karen’s husband. Karen was born in 1948.

Barry Spergel was Senior Legal Counsel and Director for Conservation Finance at the World Wide Fund for Nature (WWF) USA based at 1250 24th Street, NW Washington, DC, from 1989 to 2003, a very long time! The WWF was founded on 29 April 1961 by Prince Bernhard of the Netherlands, with five others including Julian Huxley and Godfrey A. Rockefeller (all eugenicists). Today the WWF is based in Switzerland, has HRH The duke of Edinburgh as its president Emeritus, has revenues of over 525 million euros, has over 5 million supporters worldwide, is the world’s largest conservation organization, and derives approximately 57% of its funding from individuals and bequests, 17% from the World Bank, DFID, and USAID, and 11% from corporations. Karen Hudes, his wife, interestingly,  was a Senior Legal Counsel at the World Bank. Both the  WWF (USA) and World Bank work together, and indirectly are controlled by City of London Jews with the British Monarchy at the head.

Mr. Spergel has worked with Michael Rothschild of the Walton Family Foundation on the Forever Costa Rica Project, the first such program in a developing country to permanently meet the UN Global Protected-Area Goals. He is involved with the 2013-2017 Mediterranean MPA Network Strategy to introduce UN-mandated Marine Protected Areas in the Mediterranean. http://www.medmpaforum2012.org/en/partenaires  He has developed the Practice Standards for Conservation Trust Funds for the Conservation Finance Alliance (CFA) http://conservationfinance.org/news.php?id=185

Above all,Barry Spergel has personally written the UN/World Bank/IMF global plan for global ‘Conservation Finance’ called Limitations and Opportunities for financing protected areas all around the world – through World Bank/IMF bilateral debt reduction for biodiversity conservation swaps, debt-for-nature swaps, introducing new property tax surcharges to pay for conservation land acquisition, greatly increasing visitor fees to conservation areas etc. This involves massively increasing the current global spending of $6 billion per year to $45 billion per year. You can read his presentation about his plans here: http://www.authorstream.com/Presentation/Saxaphone-8300-ESSD-Roundtable-G-Finance-II-Barry-Spergel-PPT-CONSERVATION-FINANCE-Global-..."



disabledvet's picture

well...if they need another three billion in six weeks that should just about answer the question.

"President goes to Saudi Arabia first" i might add. THEN goes to Europe.

Winston Churchill's picture

Uninvited more likely.

Are OPEC ,and the GCC about to sell oil in any fiat ?

kaiserhoff's picture

I'd love to see Air Force One fly through the cross fire in Syria.

Got popcorn?

smlbizman's picture

he found out it wasnt "golf"

Schmuck Raker's picture

It seems clear some of these hedge funds haven't been investing enough in lobbying.

Ifigenia's picture

whats the rating of Puerto Rico

Dr. Venkman's picture

As far as roadside arroz con pollo goes, AA+

Bonds are junk though

kaiserhoff's picture

This 3.5 Billion is senior to the other 70 Billion outstanding. Contracts enforceable in the States.

Tells you what PRs future is really worth.  I made this point two weeks ago on Bruce's piece.  This "saves" Porto Rico by doubling the interest rate going forward.  Ooops.

Ban KKiller's picture

Hedge funds pump and dump? Money above rules and ethics?

This is what Wall Street does. 

Kicked  that can down the beach...No worries, buy PR bonds.


ebworthen's picture


Worthless bonds being shoveled onto the retail mom & pop and pension fund balance sheets?

I'm shocked!  Shocked I tell you!  Next they'll be rescinding GM Bondholder rights and vaporizing accounts!

Oh wait...

q99x2's picture

You forgot the all important and entertaining question:

How many banksters are going to jump on this?


kaiserhoff's picture

Now that's cold.

Can we get a weekly over/under going?

DelusionalGrandeur's picture

They could always ask Belgium who seems flush with cash.

NOZZLE's picture

Shitpotle stock to $800

Soul Glow's picture

A lot of bonds are owned by the United States, government and private a like, because they are tax free.  That is the selling point anyway.

ShrNfr's picture

Want to try and run that one past me again? The US government does not own these bonds in any size I know of. The US government does not tax itself.

Most of these bonds are owned by taxable objects.

ShrNfr's picture

So if you are an institution, and you bought $200,000 of par in the offering, you should be able to sell $25,000 of par to another institution who owns $100,000 of par already. There may be less here than meets the eye, or there might not be. I think the reaction is not entirely justified quite yet. Of course, the brokers/hedge funds could give a crap about the law, so they may have broken it. I suppose we will find out.

WSJ says they have seen some $5,000 par lots going across. That is much more likely to have been retail and so I suspect we have a broker or three gone bad. A surprise as we know.


Yen Cross's picture

  I was thinking the same thing. Good comment.   Those bonds definitely have some sort of weasel clause in them..


  2035 lmao! Interest rates will probably be negative 10% just to service the interest on the gargantuan mountain of principle debt piled up by then.


fonzannoon's picture

I did not follow this as closely as i should have because i was interested in it. but i thought that these hedgies were getting these bonds at a discount and then planned on flipping them over to retail at par. of course once retail tries to flip them the hedgies will say no fuckin way and probably buy them back at 60 cents on the dollar before the next bailout where the bonds are taken off their hands substantially higher...thus the never ending cycle of hookers and coke provided by retail.

But maybe i have it wrong.

kaiserhoff's picture

An institution buys $25,000?  That's a quarter of a catering bill.

You're spot on with the first post.  Only individuals (through funds) own tax free stuff.

TrustWho's picture

What do you expect in a ZIRP and QE driven Federal Reserve market? FINRA just continues the comedy. The great american regulation entities are always after the fact to cover their implicit involvement.

drinkin koolaid's picture

Oops, there goes the 8% ANNUAL yield in one WEEK.

VegasBob's picture

The bonds were issued at 93, so a drop in price to 92 is not a big deal just yet, unless one bought at a price higher than 93.

It is true that some of the hedge funds that bought at 93 on March 11 flipped the bonds a few days later at prices up to 96, and that resale prices on a few trades have gone as high as 99, so those buyers are in the red already.

Eventually we are going to see surreptitious Fed bailouts of Puerto Rico, Illinois, New Jersey, California, etc.  After all, the Fed has already redeemed virtually all other bad debt over the past 5 years...

ThroxxOfVron's picture

Trading with a total $280M in inpairment.  Yikes!

Um, if the Bonds don't recover the 8% annual is basically lost for duration.

These are now big fat zeros that no one will be able to unload without realizing the 8% loss immediately on their balance sheet.  

...& these are the brand new super senior bonds to boot.

How long can bankrupt Puerto Rico keep borrowing?  How many muppets with that kind of coin are left to fleece?

Good thing the Wall St. and Main St. Banks, Annuities and Pension Funds left this shit to the hegies; any bank that has this shit in quantity has totally fucked their capital ratio and any annuity has just bought a 20 year zero with high probability of default embedded to boot..  It's the kind of thing that might show up in a stress test or a quarterly or something and cause a panic somewhere...

fxrxexexdxoxmx's picture

What is the problem? Wanna bet the buyers somehow have access to free money from the Fed? If all else fails Old Yellen will buy them so her friends and family who now have them will not take a loss. When g-d has told you and your genetics are special; you get special treatment.

Only those who do not have a special relationship with g-d take a real loss in Fiat World.

Who in the hell would purchase this crap from PR unless they already know they have just this kind of special realtionship with the chosen?

Muppet's picture

Exactly.  "You WILL buy the PR bonds, capisce?"     And as far as stress tests.... its not like we gotta mark-to-market.   In other words.... "forget about it".

Yancey Ward's picture

“It’s not what the deal was meant to do -- to keep the risk with those who understand it.” 


Yeah, right.

Paracelsus's picture

But they are gonna get a bailout, right? No sovereign debt defaults are allowed,right?

Don't go to sleep with any pissed off PR women in the house with access to cutlery if your last name is Bobbitt.

Long Titanium Jockstraps!

Arrowshot's picture

Would you like to wonder how the vote for statehood will go this time? Time to bring in a few more Senators and Congress-critters to keep things stable and to keep the poor Puerto Ricans from starving as well as to offer them Obamacare.

CreditcalMass's picture

This deal priced at $93, no large trades (1mm par minimum) took place above 96 and 7/8ths.


The island is fucked, but its hysteria on ZHs part to pretend like this deal came at par and is now trading off 8 points.

SmittyinLA's picture

Actually, a  Puerto Rico bond default may force PR out of US jurisdiction and US Courts as the court imposed bankruptcy terms may be too onerous for Puerto Ricans to accept.