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The restructuring of Puerto Rico's roughly $70 billion in outstanding debt would be the largest in the history of the U.S. municipal bond . However, the reaction of the muni bond market today is very positive - they all up sharply. Any idea why?
The Barrons and NYT articles really weren't too helpful on this with respect to DavidV's question. Can only speculate that the "damage" component had already been "built in", so today's reaction was possibly relief as the situation clarifies and resolves, one way or the other.
@Sven Puerto Rico bonds are exempt from federal and ANY state taxes. That is why OPCAX, CA muni fund I own holds 11% Puerto Rico muni. The fund is up 0.83% today. Even ORVAX with 33.8% Puerto Rico bonds is up 0.36% today. Something I do not understand. I just noticed that the article is from 2015 and percentage of Puerto Rico bonds is outdated.
DavidV, Under bankruptcy protection laws, Puerto Rico will not have to pay their monthly dividend while it is being restructured. As debt holders, you will experience smaller dividend paid to OPCAX until a restructured plan is approved. NAV will not reflect the SEC yield until the payout date. This mess can linger for a while until restructure plan is approved by the court. Usually that means that the bond holders may received a lesser amount of payout as dividend.
Actually PR problem stemmed back several years when they have issue of not able to meet their obligation. Oppenheimer muni bond funds offer higher yield while carry with sizable PR bonds exposure, so does the risk. On the flip side, Vanguard being a conservative house, have less than 1% of PR bond in the national or CA muni bond funds.
Under bankruptcy protection laws, Puerto Rico will not have to pay their monthly dividend while it is being restructured. As debt holders, you will experience smaller dividend paid to OPCAX until a restructured plan is approved. NAV will not reflect the SEC yield until the payout date. This mess can linger for a while until restructure plan is approved by the court. Usually that means that the bond holders may received a lesser amount of payout as dividend.
Actually PR problem stemmed back several years when they have issue of not able to meet their obligation. Oppenheimer muni bond funds offer higher yield while carry with sizable PR bonds exposure, so does the risk. On the flip side, Vanguard being a conservative house, have less than 1% of PR bond in the national or CA muni bond funds.
Oppenheimer Rochester funds have always played fast and loose, well before PR had problems with its bonds.
Six of its funds settled a class action lawsuit for this. "The [six suits, combined here] all alleged that Oppenheimer said it would invest the majority of the money in the funds in investment-grade municipal bonds, but actually invested much of it in low-rated junk bonds and derivatives." https://www.law360.com/articles/468793/oppenheimer-reaches-90m-deal-in-municipal-bond-case
Many PR bonds were already in default. I received letters last year on PR bonds I own saying that they would be missing payments. So any action, even "bankruptcy", that would improve the likelihood of future payments in any amount would be expected to increase the value of these bonds immediately.
Improved prices would decrease YTW, even though the next coupon date had not arrived. Similarly, as bond prices rose, the NAV of funds holding them would rise immediately, and thus the SEC yield of the funds would fall. YTW and SEC yield are functions of price as well as payment amounts.
From that Oppenheimer puffpiece: "The total returns on securities issued in Puerto Rico were highly attractive in 2016, according to Bloomberg Barclays Municipal indices that measure performance.1 Overall, Puerto Rico securities had a 2016 total return of 8.6%. High-yield bonds issued by the Commonwealth performed even better, offering a total return of 11.4%."
And so on. But NOT ONE WORD about the quality of that crap or possible repayment issues!
I've had a bit with Oppenheimer since the 90s. (Please don't ask why I've stuck with them.)
Investing with them can be profitable. I know they have some winners. But more often than not it feels like walking over hot coals barefoot. I've moved the bulk of the $$ there to their Limited Term Bond Fund (OUSGX). I do have a need for such a fund and (hopefully) they can't screw that one up too badly. @msf: Oppenheimer (as I suspect you know) wrote the book on "fast and loose" with their Core Bond Fund pre-2008.
@msf I think you gave the most probable explanation of the price increase after the bankruptcy: "Many PR bonds were already in default. I received letters last year on PR bonds I own saying that they would be missing payments. So any action, even "bankruptcy", that would improve the likelihood of future payments in any amount would be expected to increase the value of these bonds immediately. "
Just checked my EM bond fund, PREMX. The exposure to PR general obligation bonds (at least among the top 100 holdings, out of 407 total holdings, is 0.31%.) The fund was down today by -0.39%. Could have been much worse. PREMX has been reliable and good to me, since 2010. No reason to "bail" over this PR debacle.
Comments
Regards,
Ted
Barron's Article:
http://www.barrons.com/articles/puerto-rico-just-declared-bankruptcy-so-why-arent-these-etfs-moving-1493834229
http://cnbc.com/2015/06/30/is-your-bond-fund-invested-in-puerto-rico.html
I just noticed that the article is from 2015 and percentage of Puerto Rico bonds is outdated.
Actually PR problem stemmed back several years when they have issue of not able to meet their obligation. Oppenheimer muni bond funds offer higher yield while carry with sizable PR bonds exposure, so does the risk. On the flip side, Vanguard being a conservative house, have less than 1% of PR bond in the national or CA muni bond funds.
Under bankruptcy protection laws, Puerto Rico will not have to pay their monthly dividend while it is being restructured. As debt holders, you will experience smaller dividend paid to OPCAX until a restructured plan is approved. NAV will not reflect the SEC yield until the payout date. This mess can linger for a while until restructure plan is approved by the court. Usually that means that the bond holders may received a lesser amount of payout as dividend.
Actually PR problem stemmed back several years when they have issue of not able to meet their obligation. Oppenheimer muni bond funds offer higher yield while carry with sizable PR bonds exposure, so does the risk. On the flip side, Vanguard being a conservative house, have less than 1% of PR bond in the national or CA muni bond funds.
http://www.cnbc.com/2015/06/30/is-your-bond-fund-invested-in-puerto-rico.html
Technically PR isn't allowed to go through bankruptcy. It's using Title III of PROMESA. That looks like a duck, walks like a duck, quacks like a duck, but isn't a duck.
http://www.businessinsider.com/puerto-rico-seeking-title-iii-bankruptcy-for-public-debt-2017-5
Oppenheimer Rochester funds have always played fast and loose, well before PR had problems with its bonds.
Six of its funds settled a class action lawsuit for this. "The [six suits, combined here] all alleged that Oppenheimer said it would invest the majority of the money in the funds in investment-grade municipal bonds, but actually invested much of it in low-rated junk bonds and derivatives."
https://www.law360.com/articles/468793/oppenheimer-reaches-90m-deal-in-municipal-bond-case
OPCAX is the target of a separate ongoing class action law suit for its investments in the same time frame (2006-2008).
https://oppenheimercalmunilitigation.com/Home/FAQ
Many PR bonds were already in default. I received letters last year on PR bonds I own saying that they would be missing payments. So any action, even "bankruptcy", that would improve the likelihood of future payments in any amount would be expected to increase the value of these bonds immediately.
Improved prices would decrease YTW, even though the next coupon date had not arrived. Similarly, as bond prices rose, the NAV of funds holding them would rise immediately, and thus the SEC yield of the funds would fall. YTW and SEC yield are functions of price as well as payment amounts.
"The total returns on securities issued in Puerto Rico were highly attractive in 2016, according to Bloomberg Barclays Municipal indices that measure performance.1 Overall, Puerto Rico securities had a 2016 total return of 8.6%. High-yield bonds issued by the Commonwealth performed even better, offering a total return of 11.4%."
And so on. But NOT ONE WORD about the quality of that crap or possible repayment issues!
Investing with them can be profitable. I know they have some winners. But more often than not it feels like walking over hot coals barefoot. I've moved the bulk of the $$ there to their Limited Term Bond Fund (OUSGX). I do have a need for such a fund and (hopefully) they can't screw that one up too badly. @msf: Oppenheimer (as I suspect you know) wrote the book on "fast and loose" with their Core Bond Fund pre-2008.
MarketWatch article on the 2008 Oppenheimer bond funds blowup: http://www.cbsnews.com/news/oppenheimers-bond-fund-blowup-worse-than-you-think/
"Many PR bonds were already in default. I received letters last year on PR bonds I own saying that they would be missing payments. So any action, even "bankruptcy", that would improve the likelihood of future payments in any amount would be expected to increase the value of these bonds immediately. "