The biggest restructuring in the history of the U.S. municipal-bond market will fall heavily on hedge funds that wagered Puerto Rico wouldn’t go broke. But there’s plenty of little guys left holding the bag, too.
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More than two-dozen mutual funds hold about $15 billion of uninsured Puerto Rico bonds, about 20 percent of Puerto Rico’s $74 billion debt, according to the most recent data compiled by Bloomberg. While that’s less than what it was more than three years ago — before the island’s rating was cut to junk — the figures show that smaller investors who own mutual fund shares still have a significant stake, despite a buying spree by speculators who scooped up about a third of the government’s debt when others fled.
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OppenheimerFunds Inc., a unit of Massachusetts Mutual Life Insurance Co., is the biggest mutual-fund holder with $6.3 billion. Franklin Resources Inc., the second-biggest, has about $3.1 billion. UBS Asset Managers of Puerto Rico funds hold $1.4 billion, followed by those run by Goldman Sachs Group Inc., which have about $1.2 billion.
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Mutual funds bought the island’s debt because it offered high-yields and was exempt from taxes across the nation.
While those investments have been jeopardized by the island’s decision Wednesday to turn to a U.S. court to restructure its debt after a series of defaults, those mutual funds will likely see little immediate impact. The Caribbean territory’s crisis has been building for two years, giving funds plenty of time to pare their exposure. And the court filing — allowed under emergency legislation enacted by Congress last year — had little impact on bond prices, which had already tumbled. One of the island’s most active securities, general-obligation bonds that were first sold for 93 cents on the dollar in 2014, traded for 64 cents Friday.
The variety of bond holders, however, underscores the broad reach of the commonwealth’s crisis, which will be sorted out under the supervision of U.S. District Judge Laura Taylor Swain after it proved too vast for the government to do out of court. Puerto Rico has issued many different classes of debt backed by different revenue sources: general revenue, sales taxes, utility fees — even rum-tax money.