Muni Closed-End Funds Cut Puerto Rico Holdings 65%, Fitch Says

Municipal-bond mutual fund managers reduced holdings of Puerto Rico by about 65 percent from May through December, with more opting to sell sales-tax debt than lower-priced general obligations, Fitch Ratings said.

The sales-tax bonds, known as Cofinas, comprised on average 34 percent of Puerto Rico holdings among U.S. funds at year-end, down from 66 percent at the end of May, according to a Fitch report released today. The review encompassed 92 muni closed-end funds that the New York-based company rates, among six asset managers.

The decline “suggests that U.S. funds chose to sell Cofina bonds instead of realizing losses on the more depressed G.O. and other G.O.-linked credits,” analyst Yuriy Layvand said in the report. At the same time, others chose to “trade in a number of their G.O. holdings for the higher quality Cofina bonds, which better positioned them to weather the G.O. downgrades.”

Fitch this week joined Standard & Poor’s and Moody’s Investors Service in dropping the self-governing U.S. commonwealth’s rating to speculative grade. The companies cited a lack of access to capital markets and an economy that has contracted in six of the past seven years.

Puerto Rico and its agencies have about $70 billion of debt, and about 70 percent of muni mutual funds own the securities, which are tax-exempt nationwide, Morningstar Inc. data show.

The prices of some general-obligation pension-funding bonds have fallen as much as 56 percent since May, compared with a 35 percent drop for sales-tax debt, according to Fitch. Both securities have rallied from their lows, the company said. Fitch cut the commonwealth to BB, two steps below investment grade, though it kept the Cofina bonds above investment grade.

After Puerto Rico’s Government Development Bank yesterday said it would issue general-obligation bonds by mid-March, debt due in July 2041 exchanged hands the most since November 2012, data compiled by Bloomberg show.

The general obligations yielded an average of 8.15 percent, the lowest in about two months, the data show.

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