Mutual Funds Are Front and Center In Puerto Rico Talks

Ted

FYI: (Click On Article Title At Top Of Google Search) This is a follow-up article.

Hedge funds are known as heavy buyers of Puerto Rico bonds, but as the U.S. commonwealth works to restructure about $72 billion in debt, it is a pair of mutual-fund firms that may take the lead in negotiations.

OppenheimerFunds Inc. and Franklin Advisers Inc. together owned about $10.8 billion face amount of bonds, representing 15% of Puerto Rico’s debt as of March 31, according to The Wall Street Journal’s analysis of data from Morningstar Inc.
Regards,
Ted
https://www.google.com/#q=mutual+funds+are+front+and+center+in+puerto+rico+talks+wsj

msf

The only way I can see the figures in the article adding up is if these families own a huge amount of zeros. That's because it says the two families own a combined $10.8B in face amount, currently valued at $4.1B = $2.6B (Oppenheimer) + $1.5B (Franklin) (graphic).

That's under 40% of par value. My spot check on EMMA shows just a few interest bearing bonds trading at below 40% of par (around 35%). More typical was 50%-60% for the lowest grade bonds traded in the past week (confirming the article saying much of the debt is trading at 50-70% of par), with some in the 90%-100% range.

So they must be holding an awful lot of zeros. (Doesn't seem like a way that bond funds would spike current yield, though.)

The article says that "Calif.-based Franklin managed to cut its holdings by 35% to $3.4 billion from $5.2 billion [since June 2013]." It says that Oppenheimer stood pat at roughly $7.4B face value. (So Oppenheimer holds 70% face value of their combined $10.8B holdings. Franklin is at best a baby elephant in the room.)

Bloomberg seems to think differently, at least over the past 15 months (Feb 2014 to May 2015). It confirms that Franklin has been paring its holdings (as have most major holders), but Oppenheimer increased its holdings by about $1B (market value), i.e. 20%, over that period.

Bloomberg also reports that the market value of Oppenheimer's holdings as of May 2015 (vs. March 2015 for WSJ) is $5.5B (vs. WSJ figure of $2.6B). If you believe everyone's figures, then Oppenheimer has doubled down over the past two months.

Call it confirmation bias, but I'm inclined to believe Bloomberg. It confirms what I have been writing - there's a big difference between Oppenheimer and Franklin. Only one of them has been reckless.

heezsafe

Some more factoids, from Felix Salmon (no longer at Reuters), re. the Puerto Rican situation:
http://fusion.net/story/159325/the-tragedy-of-puerto-rico-americas-very-own-greece/

@msf Yes, it looks like your initial assessment, differentiating lenders' exposures (currently, and recent past), still looks pretty solid.

Lawlar

According to the N Y Times, 75% of the mutual funds tracked by Morningstar own some Puerto Rico bonds. The article suggests that one of the reasons Puerto Rico was able to amass a debt it could never repay is because mutual funds were engaged in competition to offer investors higher yield.

Makes one wonder if our mutual funds focus on our financial wellbeing, or their profits. I hope my Mutual Series funds don’t own any of the risky debt floating around the market place today, but since they are now owned by Franklin Templeton, they probably do.

[See article: “The Bonds that Broke Puerto Rico,” New York Times, June 30, 2015. ]

http://www.nytimes.com/2015/07/01/business/dealbook/the-bonds-that-broke-puerto-rico.html?_r=0

msf

Several of the Mutual Series funds hold the same PR bond (rated CC/Caa/CCC- by Fitch/Moody's/S&P), trading around 72 (and it was issued with OID) - not too bad. CUSIP 74514LE86.

No other PR bonds on a quick scan.

claimui

The article suggests that one of the reasons Puerto Rico was able to amass a debt it could never repay is because mutual funds were engaged in competition to offer investors higher yield.

Makes one wonder if our mutual funds focus on our financial wellbeing, or their profits.

I don't think you can just blame the mutual fund companies here. It's also the investors who hunger for yield and don't ask (or don't care) what is juicing their returns.