Muni bond funds face ongoing Puerto Rican woes

Franklin Templeton and OppenheimerFunds challenge legality of Puerto Rican debt law

Jun 30, 2014 @ 11:33 am

By Trevor Hunnicutt

Two top bond fund managers are suing Puerto Rico, arguing a plan by lawmakers that could provide relief on some debt obligations violates the U.S. Constitution.

The lawsuit, which was filed on Saturday and first reported late Sunday by the Wall Street Journal, came as the fund firms — Franklin Templeton Investments and OppenheimerFunds — fought against the prospect that investors in municipal bond funds could face a debt restructuring process and a loss on their investments.

The majority of both OppenheimerFunds' and Franklin's municipal debt products, which combined have assets of nearly $84 billion, were listed as plaintiffs in the lawsuit.

A law passed last week by Puerto Rican legislators could provide government agencies like a Puerto Rican power utility the ability to renegotiate debts with their creditors while maintaining ongoing services, according to an English-language description of the law posted on a government website.

The lawsuit, Franklin California Tax-Free Trust et al. vs. Commonwealth of Puerto Rico et al., was filed in the U.S. District Court in San Juan, and seeks to have the law overturned.

Some observers see the passage of the Puerto Rico Public Company Debt Enforcement and Recovery Act as a potential indication that investors may suffer losses in a debt restructuring. Moody's Investors Service, Standard & Poor's and Fitch Ratings this month downgraded nearly $9 billion in securities issued by the Puerto Rico Electric Power Authority, with some citing the law among factors contributing to their decisions.

Funds by Franklin and OppenheimerFunds hold $1.7 billion in bonds issued by the self-funded utility, which provides electricity to nearly 1.5 million households and businesses on the island.

In their complaint, the fund companies said only the U.S. Congress has the constitutional authority to pass bankruptcy laws. A spokeswoman for Franklin Templeton declined to comment on the suit.

"We believe it is our responsibility to stand up for the rights of bondholders and our shareholders when the unlawful acts of issuers or others threaten those rights," a spokeswoman for OppenheimerFunds said in an email.

(See also: OppenheimerFunds loses more bond bets)

The fund companies said short-dated bonds issued by the agency have declined by nearly 40% since the Senate approved the law, which does not apply to general-obligation bonds or others directly backed by Puerto Rico's taxing power.

Overall, the market has been kind to Puerto Rican bonds this year, after a disastrous 2013. The S&P Municipal Bond Puerto Rico Index is up 6.65% year to date, as of last Friday, after having lost nearly 13% over the last year. That compares with the Barclays Municipal Bond Index, which is up less than 6% this year.

Two thirds of U.S. mutual funds have exposure to the Caribbean island's debt, according to research firm Morningstar Inc., in part because of the favorable tax treatment for investors who hold those assets.

“I feel bad for the government,” said Daniel Fuss, manager of the $23.8 billion Loomis Sayles & Co. Bond Fund, in an interview before the act was passed. “They're between a rock and a hard place … It's up to the U.S. at a national level — the Congress — as to whether or not they're able to continue to service the debt.”

Puerto Rican government officials could not be reached by telephone Monday, but in a statement quoted by the Journal, the territory's Government Development Bank said it stood by the law, which it said was necessary “to fill a gap in the existed federal insolvency regime and ensure the continuity of critical public services.”

In a market analysis last week, Rafael Costas, co-director of Franklin's municipal bond department, said prices on bonds will continue be volatile as news develops in Puerto Rico.

“Puerto Rico is facing a mountain of obligations, its economy is not really growing and its government is trying to figure out how to get the economy growing again,” said Mr. Costas. “We are long-term investors, and we hope that in the long term things will work out and Puerto Rico should be on a better fiscal and economic path.”

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Jul 10

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

Events

Behind the scenes at Pershing Insite 2018

What goes on behind the scenes at one of the industry's biggest conferences? Join us for an all-access sneak peek!

Latest news & opinion

Mutual funds feel the pinch of platform fees

No-transaction-fee options are a big hit with investors, but funds wind up paying the costs — and passing them on.

Divorce reduces retirement readiness

The new tax law could increase financial challenges for divorced people, but planning opportunities abound.

Merrill Lynch fined $42 million for misleading customers

In addition to the practice of 'masking' trades, the wirehouse went to extremes to cover up the wrongdoing.

Advisers with billions in AUM leaving Wall Street

Merrill Lynch has seen two teams exit recently, each with more than $4 billion in client assets.

Wells Fargo weighs changes to wealth unit

The move would reflect the bank's effort to cut $4 billion in costs.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print