U.S. mutual funds with heavy exposure to Puerto Rico bonds have sold off some of the cash-strapped island's debt to meet investor redemption demands, taking heavy losses after a year-long slide in prices.
The sellers included some of Puerto Rico's most bullish U.S. mutual fund investors. Some of the funds run by OppenheimerFunds, a vocal supporter of the territory's recent financial improvements, have sold Puerto Rico debt, according to analysts and public filings.
But Oppenheimer's Rochester funds combined have been net buyers of Puerto Rico bonds over the past few months as its research continues to show that Puerto Rico will honor its debt obligations in full, company spokeswoman Kaitlyn Downing said.
Funds with less exposure aren't likely to unload their Puerto Rico debt at fire sale prices, said Daniel Hanson, an analyst at Height Securities LLC. They can afford to hold tight and ride out the storm.
Still, mutual funds have found willing buyers in more risk-prone hedge funds, such as Meehan Combs LP and Maglan Capital. Distressed debt funds run by Marathon Asset Management LP and Stone Lion Capital Partners LP also have shown interest in Puerto Rico's bonds, analysts said.
Puerto Rico and its agencies have about $70 billion in debt outstanding, and much of it is held by U.S. mutual funds. Its bonds are appealing because they are tax-exempt in every U.S. state, and the yields offer high returns to investors willing to stomach the uncertainty.
A darkening outlook for Puerto Rico's finances has made investors nervous about a potential default. Standard & Poors cut Puerto Rico's credit rating to junk status on Tuesday, and Fitch warned in November it could do the same.
Before the S&P's move, mutual funds run by Vanguard Group and BlackRock Inc disclosed this past week they had eliminated what they described as small positions in the territory late last year, regulatory filings show.