By Pam Martens and Russ Martens: October 4, 2017
There was likely a collective gasp at OppenheimerFunds Inc. yesterday when President Donald Trump made another of those market-moving pronouncements, telling Fox News that Puerto Rico’s debt would have to be wiped out. The President’s remarks suggested he thought the losers would be Wall Street banks. The President stated: “You know they owe a lot of money to your friends on Wall Street. We’re gonna have to wipe that out. That’s gonna have to be — you know, you can say goodbye to that. I don’t know if it’s Goldman Sachs but whoever it is, you can wave good-bye to that.”
The reality is that a large percentage of Puerto Rico’s debt is held in tax-free municipal bonds and municipal bond mutual funds, owned not by Wall Street banks or tycoons, but by mom and pop investors seeking tax-free income. (As a result of Congressional legislation, the interest on municipal bonds issued by the Commonwealth of Puerto Rico, its political subdivisions and public corporations, is not subject to Federal, state or local taxes. This has made the individual bonds and mutual funds particularly attractive in places like New York City where residents pay a Federal, state and local income tax.)
According to a semi-annual report made last month at the Securities and Exchange Commission, Oppenheimer Rochester Fund Municipals, a popular tax-free fund held by many New York investors, was sitting on a boatload of Puerto Rico municipal bonds as of June 30, 2017. The SEC filing shows over 100 different Puerto Rico bonds, issued by the Commonwealth and numerous other Puerto Rico issuers like the Puerto Rico Electric Power Authority and the Puerto Rico Sales Tax Financing Corp. (The fund, of course, holds a widely diversified portfolio of other bonds as well.)
In July, Reuters reported that Oppenheimer’s various tax-free mutual funds had the largest mutual fund holdings of Puerto Rico bonds as of April 30, totaling a whopping $7.3 billion face amount. According to Oppenheimer’s September SEC filings reviewed by Wall Street On Parade this morning, most of that debt is trading at a large discount to the face amount and the values, reported as of June 30, 2017 to the SEC, do not reflect the new market lows experienced by the bonds since Hurricane Maria made a direct hit to Puerto Rico in late September. (Reuters reported that the second largest mutual fund holder of Puerto Rico debt as of April 30 was Franklin funds, which also provides popular tax-free funds to mom and pop investors. Franklin was reported to be holding approximately $3 billion face amount of Puerto Rico bonds.)
In its September SEC filing, OppenheimerFunds notes that it has set up a special web section to provide updates on the situation with its Puerto Rico bond holdings. (See here and here.) Tellingly, those web pages have not been updated since the devastation from Hurricane Maria occurred, suggesting OppenheimerFunds understands it’s now in uncharted waters. What it had said before the hurricane hit was as follows:
“Securities issued in Puerto Rico have historically helped Oppenheimer Rochester deliver high levels of tax-free income to the shareholders in many of our 20 muni bond funds. Our funds hold a large and diverse set of bonds from Puerto Rico, many of which offer very attractive yields and all of which are exempt from federal, state and local income taxes for individual investors.
“Much has been written about political, economic and fiscal developments in the Commonwealth of Puerto Rico, and some analysts and journalists have raised questions about the securities issued on island. Credit rating agencies have also weighed in, recently with downgrades. In turn, the market has reacted.
“Over the years, however, we have seen the Puerto Rico securities held by our funds deliver highly competitive levels of tax-free income and what we believe to be high value relative to the risk they incur. We hope our shareholders have seen this, too.”
Mutual funds are always supposed to add the caveat: “Past performance is no guarantee of future results.” That would seem to be particularly relevant to the situation today.