Exposure spooks investors and assets decline, with some funds losing 33%
OppenheimerFunds Inc., the largest holder of Puerto Rico debt among mutual funds, has seen some of its funds lose almost a third of their assets in the past year, data compiled by Bloomberg show.
Investors are pulling cash from the New York-based company's funds as bondholders speculate Puerto Rico will be unable to repay all of its $73 billion of commonwealth and agency debt. Prices on Puerto Rico bonds set record lows in July after legislators passed a law that would enable certain public corporations, including the Electric Power Authority, to ask investors to take a loss.
Among OppenheimerFunds funds that hold Puerto Rico bonds, two have contracted by almost 33% in the past year, according to Bloomberg data. Two others have shrunk by about 29%.
“The level of Puerto Rico risk has increased, so investors may perceive more risk in the fund,” said Tom Doe, chief executive officer of Concord, Mass.-based Municipal Market Advisors.
Debt sold by junk-rated Puerto Rico, which has struggled to boost its economy since 2006, has been trading at distressed levels in the past year. The bonds of the self-governing commonwealth of 3.6 million are tax-free nationwide, leading 66% of U.S. mutual funds to hold them, according to Morningstar Inc.
HEDGE FUNDS
As traditional municipal-bond investors have shied away from the island, hedge funds and buyers of riskier debt have stepped in. Such investors bought most of Puerto Rico's $3.5 billion general-obligation sale in March, the biggest speculative-grade muni sale ever.
OppenheimerFunds held $5.15 billion of Puerto Rico securities as of May 29, or about 19% of its muni assets, across 20 mutual funds, according to Morningstar Inc. That was more than any U.S. mutual fund, according to the firm.
“Despite recent volatility and price declines, we have observed significant market activity for Puerto Rico's municipal bonds, with strong liquidity in both large block and retail trading,” OppenheimerFunds wrote in a July 19 commentary on its website. “Puerto Rico's bonds are currently underpriced by the municipal bond market.”
Kaitlyn Downing, a spokeswoman for OppenheimerFunds, declined to comment on the asset declines.
The Oppenheimer Rochester Maryland Municipal Fund (ORMDX:US) directed about 35% of holdings to Puerto Rico as of June 30, according to the company's website. Its assets fell to $64.9 million as of Aug. 4, down from $96.1 million a year ago, Bloomberg data show.
The fund has earned about 7% this year, beating 71% of peers.
The Oppenheimer Rochester Limited Term Municipal Fund (OPITX:US) allocated 17% of holdings to Puerto Rico as of June 30. Its assets fell to $3.45 billion as of Aug. 4, from $5.1 billion a year ago. It's earned 3.8% this year, better than 39% of comparable funds.
The electric agency, called Prepa, has extended $671 million of bank loans to Aug. 14. It tapped $41.6 million of reserves to make a $417.6 million bond payment July 1.
Prepa, with $8.6 billion of debt, may be the first public corporation to use the debt-restructuring law that lawmakers passed in June. OppenheimerFunds and San Mateo, Calif.-based Franklin Resources Inc. (BEN:US) have filed suit seeking to overturn the law, saying it's unconstitutional.
Oppenheimer holds $821.4 million of Prepa debt. Franklin has $907.2 million, according to court documents.
The $3.68 billion Oppenheimer Rochester Limited Term New York Municipal Fund (LTNYX:US), which directs 20% to Puerto Rico, and the $86.6 million Oppenheimer Rochester North Carolina Municipal Fund (OPNCX:US), which allocates about 20%, each lost about 29% of assets in the past year.
Oppenheimer investors are aware of the allocation to Puerto Rico and the associated volatility, Mr. Doe said.
