While much of Puerto Rico's $3 billion general obligation bond issue Tuesday may be scooped up by non-traditional muni buyers such as hedge funds, retail investors in one case have actually been restricted from buying the island's new debt.
Retail buyers investing through Wells Fargo Advisors haven't had the ability to purchase Puerto Rico bonds since February, The Bond Buyer has learned, after the firm moved to restrict its advisors from offering the island's bonds to their clients. Brokers at other firms have been dissuaded from offering Puerto Rico bonds to customers, sources said.
Wells Fargo Advisors, the retail brokerage arm and subsidiary of Wells Fargo & Co., instated a purchase policy on Feb. 3 prohibiting the offering of Puerto Rico bonds — with the exception of pre-refunded and escrowed-to-maturity bonds — to retail clients.
"We started thinking about the restrictions last year in anticipation of downgrades," Anthony Mattera, senior vice president of communications at Wells Fargo Advisors, said in an interview. "We thought it would be in the best interest of our clients to be a little more restrictive here in light of things like price volatility and liquidity concerns."
Wells Fargo Advisors is separate from Wells Fargo Securities, the company's investment banking division. Wells Fargo Securities has no similar restrictions in place, the bank confirmed.
The decision by Wells Fargo Advisors further supports the notion that retail investors won't see much of the $3 billion of GO bonds the Commonwealth plans to issue Tuesday. With yields as high as 8.875% expected, the deal is likely to be picked up by non-traditional buyers like hedge funds that don't often reach into the muni space.
With minimum orders on the deal set at $100,000, and many other large brokerages actively informing casual investors of the risks associated with Puerto Rico bonds, individual retailers who invest in municipal bonds won't likely play a large part in the sale Tuesday.
Wells Fargo's decision to prohibit the purchase of all non-pre-refunded and ETM Puerto Rico bonds goes further than similar firms' efforts to protect clients, according to other investment managers and brokers.
Six of the industry's top-10 leading underwriters, many of which have brokerage arms, are serving as underwriters on Puerto Rico's Tuesday sale, and no brokerage firms contacted by The Bond Buyer restrict the purchase of Puerto Rico bonds by retail customers.
UBS Financial Services of Puerto Rico, which came under scrutiny last year for allegedly giving incomplete information to clients regarding closed-end funds, does not restrict U.S. retail investors from buying the island's bonds, a representative from UBS confirmed. Only Puerto Rico residents can buy the closed-end funds.
The move by Wells Fargo Advisors may have limited investors who are comfortable with risk from seeing big returns, though, a source familiar with the Wells policy told The Bond Buyer. Often, a mandatory discussion between advisors and clients led investors to sell out of existing positions, the source said.
"Those clients are being prevented from capitalizing on the opportunity of a generation," the source said in an interview. "They could add a lot of value by sticking with the asset class they like and, now, perhaps people are not being given access to that."
Puerto Rico debt was downgraded to junk by Standard & Poor's the day after Wells Fargo implemented the purchase policy, and downgrades by Moody's Investors Service and Fitch Ratings followed shortly thereafter. Puerto Rico general obligation bonds maturing in ten years have rallied 116 basis points since then, according to Municipal Market Data.
The move was unprecedented, the source with knowledge on the matter said, pointing out that Wells hadn't taken such a measure, even with junk-rated bonds, in the recent past.
"Everything up to banning the purchase is standard, they crossed the line in the sand when they banned the buying of anything," the source said. "Essentially forced selling into the worst part of the selloff."
The purchase policy limiting all Puerto Rico bonds was preceded by a roughly month-long period in which the option to purchase insured Puerto Rico bonds and the island's Sales Tax and Financing Corp. (COFINA) bonds was available to clients, the person said.
"That is a bit atypical, unusual, to limit the buying like that," John Donaldson, director of fixed income at Haverford Trust, said in an email. "In theory you're operating on what you think is best for clients, but a lot of muni bond funds have exposure to Puerto Rico for a little yield enhancement, it's not atypical nor is it bad."
One financial advisor on the west coast said that his firm had taken similar cautionary measures on Puerto Rico bonds, apart from actually disallowing brokers from offering the bonds.
"Because of the uncertainty, volatility and liquidity issues, it's been very difficult to try and do this for retail," the advisor said in an interview. "That's been the combination that's had us back off from offering Puerto Rico to retail customers, even though clearly we've missed a pretty good rally."
The $3 billion deal Tuesday will bring some relief to the Commonwealth's economic woes, but doesn't put Puerto Rico in the clear, the advisor said. The looming concern over whether the island can get its finances in order has led to caution on behalf of brokers.
"Advisors may be making trades that are significantly away from contemporary trades, and how do you explain that to clients," the advisor said. "It's been kind of a freight train in both directions, and to be prudent, some people don't want to get in front of it."
