Puerto Rico default could blindside investors in municipal bonds

Some muni funds, such as Oppenheimer, are over-exposed to the risky bonds

May 2, 2016 @ 12:01 pm

By Jeff Benjamin

As the Puerto Rican government embraces default as a way of dealing with a $422 million debt payment due Monday, a lot of investors and financial advisers might be surprised at how exposed they are to the island country's financial woes.

Even investors in single-state municipal bond funds are likely to have some exposure to the heavily indebted economy.

Because of Puerto Rico's triple-exemption status, which means the income on its bonds are exempt from taxes at the federal, state and local levels, some municipal bond shops have been loading up on the country's higher-yielding debt.

The biggest player in the muni-bond space has been OppenheimerFunds, which has many of its single-state muni bond funds loaded up with Puerto Rican debt.

An OppenheimerFunds spokeswoman did not comment about specific portfolio positions, but acknowledged that the situation in Puerto Rico is being closely monitored.

"OppenheimerFunds has been managing investments in Puerto Rico for more than 20 years," said spokeswoman Kimberly Weinrick. "We continue to work constructively with all parties involved in an effort to try to reach an equitable agreement."

According to Morningstar, OppenheimerFunds makes up 17 of the top 20 funds ranked by allocations to Puerto Rican bonds.

The Franklin Double Tax-Free Income Fund (FPRTX) tops the list with 44.72% of the portfolio weighted in Puerto Rico, but the next 13 slots belong to OppenheimerFunds, with Puerto Rican exposure ranging from 12.87% to 42.6%.

The data is through March 31, and the Franklin fund was merged in late April into the Franklin High Yield Tax-Free Income Fund (FRHIX).

Considering that the list is made up mostly of single-state funds, investors and financial advisers might be confronting a rude awakening as Puerto Rico's government continues to try and maneuver around its $70 billion worth of debt that it cannot afford to pay.

In addition to Monday's debt-payment deadline, the country has another $2 billion debt payment due on July 1.

Puerto Rico is prevented under U.S. law from filing Chapter 9 bankruptcy, which is often used by local governments.

That unique legal twist introduces a special challenge in Puerto Rico, according to Ron Bernardi, president and chief executive of fixed-income broker-dealer Bernardi Securities.

“It is a huge problem that has got to be dealt with, and all the creditors will have to concede something,” he said. “There are 3.5 million people there in pretty dire circumstances; I think Congress needs to get involved.”

For financial advisers and investors, the lesson here is the pay close attention to where your portfolio manager is going for yield in the muni space.

“Over the past decade we've seen more mutual funds participate in the Puerto Rican bond market, because the higher-yield component appeals to some portfolio managers,” said Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ.

While bond yields are generally viewed as an indicator of risk associated with the investment, Mr. Rosenbluth said, “There are some active managers who believe the credit risk of a security is different from what the rating agencies are saying.”

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Regional brokerages are picking up assets, advisers from wirehouses

Senior columnist Bruce Kelly discusses with deputy editor Bob Hordt the impact of big brokerage houses pulling back on recruiting and regionals promising recruits less bureaucracy.

Latest news & opinion

Regional broker-dealers quietly making comeback now, but the future remains uncertain

After a period of decline, the regional brokerage industry is scoring recruiting gains at the expense of wirehouses.

10 tips for hiring top young advisers

Hiring is not easy and retaining good employees can be even more difficult. Here's a roadmap for bringing on new advisers and training them — and even firing them, if necessary.

Kestra Financial latest broker-dealer to be put up for sale

The independent B-D's owner, Stone Point Capital, has tapped Goldman Sachs to lead the deal.

Wells Fargo Advisors 2019 comp plan sees little change

But lowest-producing advisers face a pinch in pay.

8 adviser fears for 2019

Interest rates, trade wars and bear markets, oh my! Looking across the industry, here are some of the biggest concerns heading into the new year.

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