Puerto Rico Cuts Push OppenheimerFunds Junk Holdings Above Limit

OppenheimerFunds Inc. has municipal funds with more speculative-grade holdings than prospectuses allow after Puerto Rico was cut to junk by the three biggest rating companies.

The asset levels prohibit the money manager from adding junk debt in those funds, and will persist “in certain cases, significantly and possibly for an extended period,” the New York-based company said today on its website.

OppenheimerFunds has about $4.6 billion of Puerto Rico debt, the most among mutual fund companies, data compiled by Bloomberg show. Of the 22 funds with at least 10 percent of holdings allocated to the island, 16 belong to OppenheimerFunds, according to Morningstar Inc. data through Feb. 6.

The company said today that while there’s “room for improvement” in Puerto Rico, the downgrades haven’t changed its opinion of the commonwealth’s creditworthiness. The territory’s debt is tax-exempt nationwide.

“The Oppenheimer Rochester investment team continues to believe that the commonwealth is moving in the right direction, and that the Puerto Rico securities held by our funds have provided high value to our shareholders relative to the risk,” according to the statement.

It cited the government’s willingness to repay investors and its inability to file for Chapter 9 bankruptcy.

February Cuts

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings have all cut Puerto Rico to speculative grade since Feb. 4 on concern that a contracting economy will make it difficult for the self-governing commonwealth and its agencies to repay about $70 billion of debt. Junk debt is rated below Baa3 by Moody’s and lower than BBB- at S&P or Fitch.

About 70 percent of municipal mutual funds own island securities, giving its finances an outsized impact in the $3.7 trillion local-debt market.

OppenheimerFunds said after the S&P downgrade that its funds could be barred from adding junk bonds if Moody’s and Fitch also lowered the island. The company posted on Twitter the day of the first cut that it has an 11-person credit research team and remains confident in its analysis.

The company has 20 municipal-bond mutual funds, according to its website. The prospectuses for its five managed-maturity funds allow 5 percent of investments in speculative-grade debt. Its longer-term funds can have a 25 percent allocation of junk bonds and there’s no limit to how much its high-yield municipal fund can own, according to the statement.

OppenheimerFunds’ state-specific funds focused on Maryland, Virginia, North Carolina, Massachusetts and Pennsylvania have the biggest weightings toward Puerto Rico, with each exceeding 25 percent, Morningstar data show. Its Limited-Term New York Municipal Fund also has a quarter of its bonds from the commonwealth, the data show.

Kaitlyn Downing, a company spokeswoman, didn’t immediately return a voicemail or e-mail seeking comment on the funds.

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