OppenheimerFunds Loses Most as Puerto Rico Tumbles: Muni Credit

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Flags fly above Castillo San Cristobal, a San Juan National Historic site in Old San Juan.

OppenheimerFunds Inc. is the biggest loser as mutual funds investing in municipal debt get pummeled by the worst year for Puerto Rican bonds since at least 2000.

Oppenheimer Rochester Fund Municipals (RMUYX) has about 26 percent of its $6.5 billion in assets in the U.S. territory and has lost almost 12 percent in 2013, data compiled by Bloomberg show. That’s the biggest allocation among all open-end muni funds that are at least three years old, oversee $500 million or more and target institutional clients. Western Asset New York Municipals, with the next-highest percentage in Puerto Rico debt, fell about 8 percent. The declines exceed the 5.1 percent drop this year for the $3.7 trillion municipal market.

Puerto Rico is rated one step above junk, and its economy shrank in the 12 months through July at the fastest pace in 41 months. Its debt has declined 18.6 percent in 2013, on pace for the worst annual loss in at least 13 years, Standard & Poor’s data show. The losses have ensnared funds nationwide that hold the securities because they are tax-exempt in all 50 states.

“This is more a sell-off based off of fear than it is based off of reality,” said Steven Shachat, who manages $1.6 billion of munis, including Puerto Rico debt, at Alpine Woods Capital Investors LLC in Purchase, New York.

Speculative Brink

A self-governing commonwealth of about 3.7 million people, Puerto Rico is on the brink of speculative grade as Governor Alejandro Garcia Padilla, 42, strives to reduce recurring budget deficits and strengthen a pension system with a lower funding level than that of any state.

The territory is working on improving its finances “and we continue to believe the island is on the correct path,” Tanya Valle, a spokeswoman for New York-based OppenheimerFunds, which manages about $208 billion, said in a statement. “Puerto Rico has never missed a general-obligation interest payment or principal payment.”

The company declined to make the Rochester fund’s managers available for an interview.

Yields on some Puerto Rico bonds jumped to records this week, exceeding losses in the rest of the local-debt market. Benchmark muni interest rates set a two-year high this month amid bets the Federal Reserve will curb its monthly bond purchases.

Historic Level

The commonwealth’s economy shrank 5 percent in the year through July, the biggest contraction since February 2010, according to the Government Development Bank for Puerto Rico, which handles the island’s capital-market transactions.

Puerto Rico general obligations maturing in July 2040 traded Sept. 9 with yields at a record 10.08 percent. The average interest rate was almost five percentage points above benchmark munis, twice the spread on Aug. 6, Bloomberg data show.

Following the jump in yields, the Government Development Bank said it would reduce its financing plans for the rest of 2013 to no more than $1.2 billion of new issues for the commonwealth and its agencies.

Garcia Padilla, a member of the Popular Democratic Party who took office in January, “has already begun to make tough decisions that address some of the concerns raised by rating agencies, including dramatically restructuring the pension system,” the bank said in a statement.

The Oppenheimer Rochester Fund invests at least 80 percent of net assets in investment-grade debt sold in New York. It lost 11.7 percent this year through Sept. 11, trailing 95 percent of peers, Bloomberg data show.

Track Record

The fund has earned 3.5 percent on average in each of the past five years, beating 65 percent of competitors, Bloomberg data show.

The $806 million Western Asset New York Municipals (SNPYX) Fund directs at least 80 percent of assets to debt from New York. It has lost 7.8 percent this year, underperforming 72 percent of peers, Bloomberg data show. About 10.7 percent of the fund is in Puerto Rico debt.

While Puerto Rico faces financial challenges, credits such as debt backed by sales taxes benefit from a reliable revenue stream and an improving collection process, said Robert Amodeo, who helps manage about $30 billion of debt at Western Asset Management Co. in New York.

“We’ve been very vocal and open about our exposure to Puerto Rico and it includes only a few different issuers” Amodeo said. “Our strategy is to own the best names that we think are sound fundamentals at prices that we think are steep discounts.”

90th Percentile

The fund has earned about 3.9 percent on average in each of the past five years, beating 90 percent of similar accounts, Bloomberg data show.

Given the jump in Puerto Rico yields, the money manager is considering buying commonwealth securities.

“We’re active in the Puerto Rico market for opportunities to potentially add to names that we like, as long as we can buy them at steep discounts,” Amodeo said.

The fund with the third-biggest Puerto Rico allocation has outperformed 94 percent of its competitors this year in part by focusing on shorter maturities.

The $1.4 billion Alpine Ultra Short Tax Optimized Income Fund (ATOIX) dedicates 10.3 percent to Puerto Rico, Bloomberg data show. Of that, the bulk is in variable-rate notes secured by bank letters of credit, said Shachat.

“I can go to the bank and draw off the letter of credit to pay my bonds off at any time I want,” Shachat said.

Maturity Benefit

The remainder is in Puerto Rico bonds due in 10 months, Shachat said. About 84 percent of assets were in securities maturing in six months or less as of July 31. The fund has earned 0.25 percent this year.

Debt maturing in four years or less is the best-performing part of the market, gaining 0.4 percent this year, according to S&P.

Shachat plans to take advantage of spiking Puerto Rico yields.

“We are absolutely looking at opportunities to potentially add to that position,” Shachat said.

Localities nationwide are set to sell $3 billion of long-term debt next week, the least for a non-holiday week since December, Bloomberg data show.

At 3.06 percent, yields on 10-year benchmark munis are the lowest since Aug. 20 after posting the biggest one-day decline since June. The interest rate compares with 2.91 percent for similar-maturity federal bonds.

The ratio of the yields, a measure of relative value, is 105 percent, compared with a five-year average of about 101 percent. The higher the figure, the cheaper munis are relative to Treasuries.

NYU Ahead

Following is a pending sale:

The Dormitory Authority of the State of New York plans to sell $183 million of tax-exempt and taxable debt as soon as Sept. 25 for New York University, according to Moody’s Investors Service. Proceeds will go in part toward buying a facility on Manhattan’s Lafayette Street and constructing a building for dental and nursing programs near the NYU Hospitals Center, according to S&P. The companies give the university their fourth-highest grades with a stable outlook. Though the school has “impressive” fundraising, extra debt beyond current plans “could pressure the rating,” S&P said.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net.

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