| BOSTON, July 16
BOSTON, July 16 OppenheimerFunds' municipal bond
portfolios hold $4 billion in uninsured Puerto Rico debt,
leaving them open to bigger potential losses than rivals as the
Caribbean island's fiscal problems escalate.
Rival U.S. municipal fund managers began selling uninsured
Puerto Rico debt several months ago, at prices not far below
insurance-backed bonds. But OppenheimerFunds' management team
has kept in place one of the mutual fund industry's biggest
bets, on the cash-strapped island's turnaround, fund portfolios
Much of that bet is not backed by insurance, unlike at other
mutual fund companies, according to Oppenheimer's latest
disclosure about its Puerto Rico holdings. Unrealized capital
losses at OppenheimerFunds could surge if the value of Puerto
Rico bonds do not recover.
The Standard & Poor's Municipal Bond Puerto Rico Index is
down 3.85 percent so far in July, lagging the 0.33 decline on
the broader S&P Municipal Bond Index.
OppenheimerFunds' Rochester brand of municipal funds ended
June with about $28.4 billion in assets. And nearly 17 percent,
or $4.7 billion, in fund assets had direct exposure to Puerto
Rico. Some $4 billion of that direct exposure was not insured,
according to Oppenheimer.
Uninsured bonds issued by Puerto Rico's electric authority,
for example, are trading around 40 cents on the dollar, down
from more than 70 cents in mid-June, according to trade activity
quoted on Electronic Municipal Market Access.
OppenheimerFunds, a unit of insurer MassMutual Financial
Group, declined to comment.
Until recently, OppenheimerFunds management team has
insisted that Puerto Rico is able and willing to make good on
about $70 billion in outstanding municipal debt. But that
resolve may be weakening after Puerto Rico last month passed a
law that would allow the U.S. territory to reduce or defer
payments on its debt, leaving bondholders vulnerable to losses.
"Clearly, it is not a big leap to view the legislation as an
indication that Puerto Rico's willingness to pay may be
weakening," OppenheimerFunds told investors in a July 3rd
letter. "But all of this is speculation, and in our opinion,
Nevertheless, municipal funds run by OppenheimerFunds and
Franklin Templeton sued the commonwealth last month,
asking a federal judge in U.S. District Court in Puerto Rico to
strike down the law. Fund managers at Templeton, part of
Franklin Resources Inc, declined to comment.
Small funds run by Oppenheimer appear most vulnerable
because they have the highest percentage of direct exposure to
Puerto Rico while holding the largest proportion of bonds issued
by the island's beleaguered electric authority, fund disclosures
Nearly 35 percent of the $65 million in net assets at the
Oppenheimer Rochester Maryland Municipal Fund are
directly exposed to Puerto Rico debt. None of the Puerto Rico
bonds in the fund are insured, according to Oppenheimer's latest
Making matters more risky, the fund's exposure includes a
4.4 percent holding in Puerto Rico Electric Power Authority
(PREPA) bonds. That is considered Puerto Rico's most toxic debt
after PREPA recently disclosed it used about $42 million from
its reserves to make a July 1 bond payment of $472 million.
PREPA's debt also could be restructured under Puerto Rico's
newly passed law.
In total, Oppenheimer's Rochester funds hold about $821.4
million of PREPA bonds, according to its complaint in the U.S.
Rivals have been less willing to hold uninsured Puerto Rican
debt. At Eaton Vance Corp in Boston, municipal funds sold
uninsured PREPA debt last year at relatively attractive prices,
said Tom Metzold, a senior portfolio manager at the company.
In October, for example, Eaton Vance sold uninsured PREPA
debt for about 72 cents on the dollar and substituted it for
insured debt for about 78 cents on the dollar, Metzold said.
That turned out to be a good trade because the uninsured PREPA
bonds are now trading around 40 cents on the dollar, compared to
insured ones trading near par.
"The market is saying that the insurance is worth
something," Metzold said.
Bond insurance guarantees payment of the principal and
interest on municipal bonds.
While several portfolio managers said they are confident
that municipal bond insurers can make good on their Puerto Rico
guarantees, credit-rating agency Moody's Investors Service is
showing some concern.
Assured Guaranty Ltd, MBIA Inc and Radian
Group Inc all have significant exposure to Puerto Rico,
Moody's said. MBIA's National Public Finance Guarantee reported
$1.5 billion in gross exposure to Puerto Rico debt at the end of
(Reporting by Tim McLaughlin; Editing by Richard Valdmanis and