Redemptions force U.S. mutual funds to unload Puerto Rico debt

viernes 7 de febrero de 2014 13:16 GYT

By Tim McLaughlin

BOSTON Feb 7 (Reuters) - 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 including OppenheimerFunds, a vocal supporter of the territory's recent financial improvements, according to analysts and public filings.

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.

The top 10 U.S. mutual funds with the greatest exposure to Puerto Rico have been hit with nearly $3 billion in net outflows over the past year, according to Morningstar Inc. data, amounting to about a quarter of the funds' combined net assets.   Continuación...