Oppenheimer, other funds cling to Puerto Rico municipal bond debt as possible default looms

A $2 billion payment is due July 1 and funds still have big chunks of the bonds in their portfolios

Apr 26, 2016 @ 12:01 am

By John Waggoner

As Puerto Rico lurches closer to default on its $72 billion in municipal debt, a few funds still have big chunks of the bonds in their portfolios.

The Puerto Rico Development Bank could default on its $422 million in debt payments on May 1. Another $2 billion of Puerto Rican borrowing comes due in July 1. Puerto Rico cannot declare Chapter 9 bankruptcy, which covers local governments.

The island territory has proposed that all investors concede to taking a cut, with holders of general obligation bonds who do not live in Puerto Rico getting 74 cents on the dollar and bonds backed by sales taxes taking 54 cents on the dollar, according to the New York Times. Those who own General Development Bank bonds would get 36 cents on the dollar.

Municipal bond funds, particularly state-specific funds, were fond of Puerto Rico's bonds because they are free from local, state and federal income taxes across the U.S. Oppenheimer Rochester Maryland Municipal (ORMDX), for example, has 48.2% of its assets in Puerto Rico as of the end of February, according to Morningstar. Its Virginia municipal bond fund has 40.8% of its assets in Puerto Rico. Both funds have lost money the past three years.

"Oppenheimer funds continues to work constructively with all parties involved in an effort to try to reach an equitable agreement," a company spokeswoman said.

No other open-ended funds in Morningstar's database are as enthusiastic about Puerto Rico's debt, although Finra ordered UBS to pay three investors more than $470,000 in March in an arbitration case about that company's sale of Puerto Rican bonds.

Eaton Vance Oregon Municipal Income (ETORX) had 9.31% of its portfolio in Puerto Rico bonds as of the end of February. MainStay Tax-Free Bond (MKINX) had 8.8% of its portfolio in Puerto Rico bonds.

“I think some of the larger sponsors of municipal bond funds divested them earlier on,” said Morningstar senior analyst Beth Foos.

Columbia Tax-Exempt fund (COLTX), one of largest muni funds, has less than 1% of its assets in Puerto Rico bonds, and Fidelity Tax-Free Bond (FTABX), Nuveen All-American Municipal Bond (FLAAX) and T. Rowe Price Tax-Free Income (PRTAX) have no Puerto Rico bonds, according to Morningstar.

In an April 7 conference call, Oppenheimer Rochester management noted that about 50% of the Oppenheimer Rochester funds' holdings were general obligation bonds or COFINA bonds, which are backed by sales and use taxes. “We continue to believe in the strong legal protections spelled out in the bond indentures of these documents and will continue to pursue the best interests of our shareholders,” the transcript said. “We believe that the turnaround Puerto Rico needs is best achieved through good-faith discussions among Puerto Rico and its stakeholders.”

Puerto Rico remains mired in recession. Its unemployment rate is 11.8%, vs. a 5.0% rate for the U.S.

In the meantime, Congress seems no closer to a solution to Puerto Rico's debt problems. House Speaker Paul Ryan was supposed to offer a plan by March 31, but the bill has stalled in committee. Ads against a bailout — by anonymous political action committees — appear regularly on CNBC and elsewhere. Even John Oliver, host of Last Week Tonight, has weighed in on the subject, enlisting “Hamilton” creator Lin-Manuel Miranda to rap a plea for a solution.

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