Puerto Rico cuts push OppenheimerFunds' junk holdings above limit

Fund company says while there's “room for improvement,” commonwealth "moving in the right direction"

Feb 13, 2014 @ 9:08 am (Updated 11:19 am) EST

puerto rico, municipal bonds, oppenheimerfunds, junk, S&P, fitch, Moody's

OppenheimerFunds Inc. has municipal funds in which speculative-grade holdings exceed limits outlined in prospectuses after Puerto Rico was cut to junk by the three biggest rating companies.

As a result, the money manager said it is unable to add junk debt in those funds. The asset levels will persist “in certain cases, significantly and possibly for an extended period,” the company said Wednesday on its website. The announcement came a day after Puerto Rico said it plans to sell bonds to refinance debt and raise cash.

OppenheimerFunds has about $4.6 billion of Puerto Rico debt, the most among mutual fund companies, data compiled by Bloomberg show. Of the 22 funds with at least 10% of holdings allocated to the U.S. territory, 16 belong to OppenheimerFunds, according to Morningstar Inc. data through Feb. 6.

The company said Wednesday that while there's “room for improvement” in Puerto Rico, the downgrades haven't changed its opinion of the commonwealth's creditworthiness. The territory's debt is tax-exempt nationwide.

“The Oppenheimer Rochester investment team continues to believe that the commonwealth is moving in the right direction, and that the Puerto Rico securities held by our funds have provided high value to our shareholders relative to the risk,” according to the statement.

It cited the government's willingness to repay investors and its inability to file for Chapter 9 bankruptcy.

FEBRUARY CUTS

Standard & Poor's, Moody's Investors Service and Fitch Ratings have cut Puerto Rico to speculative grade on concern that a contracting economy will make it difficult for the self-governing commonwealth and its agencies to repay about $70 billion of debt. Junk debt is rated below Baa3 by Moody's and lower than BBB- at S&P or Fitch.

The commonwealth plans to bring a general-obligation deal by mid-March, according to Government Development Bank Chairman David Chafey. Officials plan to borrow $2 billion through bonds, according to General Assembly Representative Rafael Hernandez.

About 70% of municipal mutual funds own the island's securities, giving its finances an outsized impact in the $3.7 trillion local-debt market.

OppenheimerFunds said after the S&P downgrade that its funds could be barred from adding junk bonds if Moody's and Fitch also lowered the island. The company posted on Twitter the day of the first cut that it has an 11-person credit research team and remains confident in its analysis.

The company has 20 municipal-bond mutual funds, according to its website. The prospectuses for its five managed-maturity funds allow 5% of investments in speculative-grade debt. Its longer-term funds can have a 25% allocation of junk bonds and there's no limit to how much its high-yield municipal fund can own, according to the statement.

OppenheimerFunds' state-specific funds focused on Maryland (ORMDX), Virginia (ORVAX), North Carolina (OPNCX), Massachusetts (ORMAX) and Pennsylvania (OPATX) have the biggest weightings toward Puerto Rico, with each exceeding 25%, Morningstar data show. Its Limited-Term New York Municipal Fund (LTNYX) also has a quarter of its bonds from the commonwealth, the data show.

The Maryland fund has the largest allocation to Puerto Rico debt among the company's funds, at 33%, according to Morningstar. It has gained 2.9% in 2014, beating 90% of its peers, Bloomberg data show. Over the past 12 months, it has lost about 12%, trailing 99% of comparable funds, the data show.

(Bloomberg News)

  @IN Wire

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