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OppenheimerFund’s Investors Face Big Losses in Puerto Rico Bond

Publicado: Nov 06, 2013 | Publicado en:

Like all municipal bonds, municipal bond debt issued by Puerto Rico provides investors with favorable tax benefits. Many investors view Puerto Rico bonds as equivalent to highly rated and safe U.S. debt purchased from any municipality in the United States. The reality is approximately $70 billion in bonds have been issued by the deeply indebted, unincorporated U.S. territory of Puerto Rico.

One securities house, UBS, packaged and sold more than $10 billion in highly leveraged bond funds to individual investors during the past decade. Many of the investors who bought in were mutual fund managers who are supposed to protect, preserve and grow the capital of their investors.

UBS brokers not only sold UBS Puerto Rico funds but also encouraged clients to open margin accounts and borrow money in order to buy more bonds. This practice significantly increases consumers’ risk, and now many investors who invested in the mutual fund giant OppenheimerFunds are surprised to find themselves facing double-digit losses on leveraged investments they previously believed to be relatively safe.

Investors in OppenheimerFunds Face Big Losses

OppenheimerFunds is a massive financial services firm. Many of the investors who made investments in OppenheimerFunds were not aware of the extent of the fund’s exposure to the Puerto Rican debt, nor were they aware of the tremendous risk that Oppenheimer was taking by investing so heavily in Puerto Rico bonds.
One fund, the $125 million Oppenheimer Rochester Virginia Municipal Bond Fund (ORVAX), has lost 15 percent this year alone because of its heavy investments in Puerto Rico bonds. The average single-state municipal bond has experienced a decline of 5.58 percent, and Virginia ranks dead last in terms of losses. Other state funds that are potentially at risk include the Oppenheimer Rochester North Carolina, Arizona, Maryland and Massachusetts funds, which hold more than 25 percent of the fund’s assets in USB Puerto Rico funds.
Each of the Oppenheimer funds has suffered because of the concerns about a potential Puerto Rican bankruptcy. Funds were down more than 11 percent year-to-date as of mid-October. The S&P Municipal Bond Puerto Rico Index was down a total of 21 percent year-to-date by October, which is 19 percentage points below the S&P Municipal Bond index.
For many investors, this news comes as a major surprise. They may have been unaware of the extent of their exposure or the risks they were assuming.
The year-to-date losses may only be the tip of the iceberg, as UBS Puerto Rico bonds may face another downgrade to junk bonds. The fallout for investors could mirror the disasters of the 2008 Core Bond Fund’s collapse caused by the mortgage and subprime loan crisis. Unfortunately, it appears that Oppenheimer may not have learned from its problems with the credit default swaps and mortgage-related debt and may, once again, not have adhered to new risk controls when loading up on risky Puerto Rican debt.
Investors who find themselves facing massive and unexpected losses because of the risks Oppenheimer took may have a right to take legal action and recover money they lost.