July 8 (Bloomberg) -- A Franklin Templeton Investments municipal-bond fund with the industry’s biggest allocation to Puerto Rico has sunk to the lowest in its 29-year history as prices on the struggling commonwealth’s debt set record lows.
The price per share of the $300.4 million Franklin Double Tax-Free Income Fund fell to $9.28 yesterday, the lowest since its inception in April 1985, data compiled by Bloomberg show. The drop follows Moody’s Investors Service’s three-step downgrade of Puerto Rico’s general obligations last week to B2, five levels below investment grade.
Franklin’s fund directed about 69 percent of assets to Puerto Rico debt as of May 31, according to Franklin Templeton’s website. That marks an increase from March 31, when it held 61 percent in commonwealth securities, more than any other U.S. muni mutual fund, according to Morningstar Inc. The island’s debt is typically tax-free nationwide.
“This fund is essentially acting like a Puerto Rico fund,” said Bart Mosley, co-president of Trident Municipal Research in New York. “This kind of exposure that this fund has is by far the exception.”
A Franklin fund manager wasn’t available to discuss the drop in value, Stacey Johnston Coleman, a spokeswoman for the San Mateo, California-based company, wrote in an e-mail.
Puerto Rico securities have traded at distressed levels for almost a year on speculation that the island of 3.6 million won’t be able to repay its obligations as the economy sputters.
Prices on some of the self-governing U.S. territory’s bonds sank even more after lawmakers last month approved a bill allowing some public corporations to restructure debt. The island’s securities have dropped for nine straight days, the longest slide since December, S&P Dow Jones Indices show.
Franklin Funds and Oppenheimer Rochester Funds in Rochester, New York, are challenging the new law in a Puerto Rico court.
The Puerto Rico Electric Power Authority, which provides most of the territory’s electricity, is a leading candidate to reduce its $8.6 billion of debt under the new law. Fitch Ratings June 26 cut the utility to CC, the third-lowest speculative grade.
Uninsured Prepa bonds maturing in July 2038 traded yesterday at an average of 37.1 cents on the dollar, a record low and down from 53.8 cents on June 24, the day before Governor Alejandro Garcia Padilla filed the restructuring bill. The bonds traded today at an average of 41.6 cents.
The Double Tax-Free Income Fund, originally named Franklin Puerto Rico Tax-Free Fund, was created to provide income that is exempt from federal and state levies to residents in various states, Johnston Coleman said. The company closed the fund to new investors in August 2012.
The commonwealth and its agencies have $73 billion of debt. The island’s economy has contracted about 11 percent since 2006, according to its Planning Board. Puerto Rico’s 13.8 percent unemployment rate is more than double the U.S. average.
Puerto Rico securities lost 6.4 percent last week, the steepest decline since at least 1999, S&P Dow Jones Indices show. The entire municipal market dropped 0.5 percent last week.
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