Oppenheimer Funds: Puerto Rico Debt Investment Status

OppenheimerFunds Inc. has been one of the biggest mutual-fund owners of Puerto Rico debt, with about $3.5 billion in Puerto Rican debt spread across 19 funds. However, in 2024, the company slashed its holdings of Puerto Rico bonds by nearly $1.6 billion, marking its first major retreat. This move came as Puerto Rico's debt load reached $72 billion, and the island territory proposed that investors take a cut on their holdings. While OppenheimerFunds initially stood by its investments in Puerto Rico, even as other investors fled, the company's stance appears to have shifted as the risk of default loomed.

OppenheimerFunds' position on Puerto Rico's ability to pay its debts

OppenheimerFunds Inc., the largest mutual-fund holder of Puerto Rico's bonds, has expressed confidence in the island's ability to pay its debts. Despite the governor's assertion that the $72 billion debt load is too significant for Puerto Rico to handle, OppenheimerFunds disagrees. The company's money managers, during a conference call, cited data on sales-tax collections, unemployment, and income growth as indicators of a robust economy capable of meeting its financial obligations. They attributed the governor's statements to "political cover" following unpopular spending cuts and remained steadfast in their belief that the "ability to pay remains intact."

However, this position has drawn criticism from various quarters. Ameriprise Financial, for instance, has advised its clients to sell OppenheimerFunds municipal bond funds with substantial holdings of Puerto Rican debt. Ameriprise senior analyst Jeffrey Lindell warned that as Puerto Rico bond defaults accelerate, mutual funds may be forced to reduce dividend rates and navigate volatile asset values. Standard and Poor's has also given negative ratings to several OppenheimerFunds offerings, reflecting the perceived risk associated with their significant exposure to Puerto Rico's debt.

The investment firm's stance on Puerto Rico's debt has significant implications, as it holds about $4.4 billion in uninsured obligations from the island. Puerto Rico obligations constitute a substantial portion, 13.8%, of OppenheimerFunds' total holdings, excluding tobacco bonds, insured debt, and pre-refunded securities. Notably, the company's state funds invest in securities from Puerto Rico, capitalising on their nationwide tax-exempt status.

While OppenheimerFunds predicts a rebound in the value of the island's securities, it has also actively managed its holdings. During Puerto Rico's bankruptcy proceedings, the company decreased its holdings by nearly $1.6 billion by divesting from various types of bonds and other securities. This move marked a notable retreat for the investment firm, which had previously been a significant player in the distressed island's debt landscape.

In summary, OppenheimerFunds maintains that Puerto Rico possesses the capacity to service its substantial debt obligations, basing this assertion on economic indicators. However, this position has drawn criticism, and the company has faced pressure to reduce its exposure to Puerto Rico's debt. OppenheimerFunds has since made significant adjustments to its holdings, reflecting a dynamic approach to managing the risks associated with the island's financial challenges.

The impact of Puerto Rico's debt on Oppenheimer's single-state muni funds

OppenheimerFunds, the largest mutual-fund holder of Puerto Rican bonds, has been heavily exposed to the island's debt crisis. With about $3.5 billion in Puerto Rican debt spread across 19 funds, Oppenheimer's single-state municipal bond funds have been significantly impacted by the territory's financial woes.

Puerto Rico's inability to pay its $72 billion debt has had a direct effect on Oppenheimer's funds. As the territory defaulted on nearly half of the $2 billion due on July 1, 2024, the value of the funds' holdings has declined, and they have experienced losses. For example, the Oppenheimer Rochester Maryland Municipal Fund and the Oppenheimer Rochester Virginia Municipal Fund had significant exposures to Puerto Rican debt, with 42.7% and 37.5% of their portfolios invested in the island's government debt, respectively. Both of these funds have lost money in the past three years.

The heavy weighting of Puerto Rico debt in Oppenheimer's single-state muni funds has also attracted criticism from analysts and industry peers. Ameriprise Financial, for instance, warned its clients about the risks associated with the funds' high exposure to Puerto Rico's debt. Jeffrey Lindell, a senior analyst at Ameriprise, highlighted the potential for dividend cuts and volatile asset values as the territory defaulted on its bond payments. Standard and Poor's also gave negative ratings to several of Oppenheimer's single-state muni funds with substantial Puerto Rico debt holdings.

In response to the growing concerns and losses, OppenheimerFunds has defended its position, arguing that Puerto Rico can pay its debts. However, they have also started to reduce their holdings in Puerto Rico bonds, taking advantage of a rally in the price of the distressed island's debt. Between January 30 and September 6, 2024, the firm decreased its holdings by nearly $1.6 billion.

Ameriprise's warning to clients about OppenheimerFunds' holdings

Ameriprise Financial has advised its clients to sell their OppenheimerFunds municipal bond funds with significant holdings in Puerto Rican debt, joining a growing group of critics of the funds' investments. OppenheimerFunds has approximately $3.5 billion in Puerto Rican debt spread across 19 funds, according to Morningstar.

Five of the Oppenheimer Rochester single-state muni funds have more than 30% of their portfolios invested in Puerto Rican debt. With more than $70 billion in muni debt, Puerto Rico defaulted on nearly half of the $2 billion due on July 1. The Commonwealth proposed that all investors accept reduced payouts, with bondholders outside of Puerto Rico receiving 74 cents on the dollar for general obligation bonds and 54 cents on the dollar for bonds backed by sales taxes.

Ameriprise senior analyst Jeffrey Lindell cautioned clients about the funds, stating that as Puerto Rico bond defaults accelerate, mutual funds may be forced to reduce dividend rates as bond interest payments are missed. He also noted that the net asset value of the mutual funds could be volatile as the price of Puerto Rico bonds fluctuates in response to speculation, news, or potential principal haircuts.

The heavy stake in Puerto Rico debt has raised concerns among analysts, with Standard and Poor's assigning negative ratings to several Oppenheimer funds. Oppenheimer Rochester Virginia Municipal (ORVAX), Oppenheimer Rochester Pennsylvania Municipal (OVPAX), and Oppenheimer Rochester Maryland Municipal (ORMDX) all received two stars from Standard and Poor's, with more than 35% of their portfolios invested in Puerto Rico, according to Morningstar.

Morningstar also gave Oppenheimer's Maryland fund a negative rating of one star out of five for its three-year performance. However, they gave three stars to Oppenheimer's Virginia offering and four stars to the Pennsylvania fund.

The role of OppenheimerFunds in Puerto Rico's bankruptcy

OppenheimerFunds, which oversees the single-state muni funds in question, says its products are following the letter of the regulation. Oppenheimer Rochester municipal bond funds have had some of the heaviest weightings in Puerto Rico debt. Oppenheimer Rochester funds stand by Puerto Rico as investors flee. Oppenheimer, along with Franklin Advisers, is among the island's biggest creditors, with a combined $10.3 billion in Puerto Rican debt.

As of April 30, Oppenheimer had about $7.3 billion of total exposure. 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 in the past three years.

OppenheimerFunds' role in Puerto Rico's bankruptcy is complex and multifaceted. On the one hand, the company is a significant creditor, with a large exposure to the island's debt. On the other hand, it has been working constructively with all parties involved to reach an equitable agreement. OppenheimerFunds has expressed its commitment to protecting the interests of its shareholders and maximizing their returns.

The company's cross-holdings in various credits and investment grades, including senior and junior COFINA debt, have raised questions about potential conflicts of interest and whether they can adequately represent investors' best interests. OppenheimerFunds has advocated for specific classes of debt where its funds have the most exposure, such as the COFINA junior tranche.

Overall, OppenheimerFunds' role in Puerto Rico's bankruptcy has been that of a major creditor with a long-term commitment to the island, navigating a complex restructuring process while aiming to balance the interests of its investors and Puerto Rico's path to recovery.

The performance of Oppenheimer Rochester funds amidst investor flight

The Oppenheimer Rochester municipal funds have experienced significant outflows as investors have fled Puerto Rico debt. Despite these outflows, the managers of the funds have stood by their heavy weighting in Puerto Rico debt. As of August 31, 2013, sixteen of the 20 funds had at least 10% of their assets in Puerto Rico debt, with some funds having as much as 30%. The funds' holdings in Puerto Rico paper have detracted from their performance, with 15 of the 20 funds suffering 1-month returns worse than at least 90% of their peers.

The heavy exposure to Puerto Rico debt by the Oppenheimer Rochester funds is not unique among single-state municipal bond funds. Other funds, such as the Eaton Vance Oregon Municipal Income Fund and the Wells Fargo Advantage Wisconsin Tax-Free Fund, have also had significant portions of their portfolios invested in Puerto Rico debt. However, the large weightings in Puerto Rico debt by the Oppenheimer Rochester funds have led to questions about the marketing of the funds and the U.S. Securities and Exchange Commission's (SEC) stance on fund names.

The SEC's Rule 35d-1, adopted in 2001, requires funds to invest at least 80% of their assets in the category indicated by their name. However, this rule has large loopholes. For example, the 80% threshold only applies during "normal circumstances" and funds are allowed to fall below it during times of large cash inflows or outflows. Additionally, the rule only applies to investments and does not take into account subsequent gains, losses, or sales.

The Oppenheimer Rochester funds have defended their compliance with the SEC's names rule, stating that they prominently disclose that they invest in securities issued by various U.S. territories, including Puerto Rico. However, some have argued that this loophole is inconsistent with the aim of the rule and can make it difficult to gauge the performance of the funds.

Despite the outflows and poor performance, the managers of the Oppenheimer Rochester funds have continued to stand by their research and portfolio decisions. They believe that their focus on finding value in the marketplace and producing competitive levels of tax-free income is well-suited for the market conditions. Additionally, they believe that Puerto Rico continues to show a strong willingness to pay bondholders and that the coverage ratios are sufficient and legal protections remain strong for the bonds they hold.

Recent Performance

As of June 30, 2017, the Oppenheimer Rochester Fund Municipals had assets totaling almost $4.23 billion invested in 727 different holdings. The fund has returned 3.27% over the past year, -2.92% over the past three years, 1.10% over the past five years, and 3.60% over the past decade. The fund's 30-day SEC yield is 2.73%.

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