Muni Fund Collapses To Record Lows As Puerto Rico Risk Rises

Tyler Durden's picture


Quietly behind the scenes and away from the exuberant stock market trading headlines of the mainstream media, Muni bond markets are in turmoil. Thanks to the 'shenanigans' in Puerto Rico - after lawmakers last month approved a bill allowing some public corporations to restructure debt - PR bonds have collapsed to record lows (and dragged a number of large Muni funds with them).


As Bloomberg's Michelle Kaske reports,

A Franklin Templeton Investments municipal-bond fund with the industry’s biggest allocation to Puerto Rico has sunk to the lowest in its 29-year history as prices on the struggling commonwealth’s debt set record lows.


The price per share of the $300.4 million Franklin Double Tax-Free Income Fund fell to $9.28 yesterday, the lowest since its inception in April 1985. The drop follows Moody’s three-step downgrade of Puerto Rico’s GOs last week to B2, five levels below investment grade.


Franklin’s fund directed about 69 percent of assets to Puerto Rico debt as of May 31, according to Franklin Templeton’s website.




Puerto Rico securities have traded at distressed levels for almost a year. Prices on some of the self-governing U.S. territory’s bonds sank even more after lawmakers last month approved a bill allowing some public corporations to restructure debt. The island’s securities have dropped for nine straight days, the longest slide since December, S&P Dow Jones Indices show.


Franklin Funds and Oppenheimer Rochester Funds are challenging the new law in a Puerto Rico court.

The Franklin Bond fund "is essentially acting like a Puerto Rico fund."


It seems the market is very concerned that this concern could spread. 12 of the Top 15 most viewed securities on Bloomberg are Puerto Rico bonds!


*  *  *

It appears "reach for yield" has consequences after all - and remember how exuberant the market (stocks) were after PR managed to get that bond off earlier in the year?

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Wed, 07/09/2014 - 13:49 | 4940257 BobPaulson
BobPaulson's picture

What is amazing is when goalseekers find returns in shady places and then find out there are actually down sides to investing in Puerto Rico...surprise surprise.

Wed, 07/09/2014 - 14:00 | 4940305 max2205
max2205's picture

Que bueno

Wed, 07/09/2014 - 15:55 | 4940753 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

after lawmakers last month approved a bill allowing some public corporations to restructure debt 

Hmmm, a default by any other name is just not the same.

Wed, 07/09/2014 - 14:00 | 4940306 knukles
knukles's picture

Anybody buying PR munis is crazy.
All ya gotta do is take a self-guided tour of the island to figure that one out.

Wed, 07/09/2014 - 14:24 | 4940423 disabledvet
disabledvet's picture

More like a "guided tour of your Ticonderoga Class Guided Missile Cruiser."

Might want to place a phone call into Bath Iron Works too.

Wed, 07/09/2014 - 14:00 | 4940312 NotApplicable
NotApplicable's picture

Yeah, they should've stuck to those Illinois Pension bonds. Nothing shady there.

Wed, 07/09/2014 - 14:02 | 4940316 TahoeBilly2012
TahoeBilly2012's picture

Enslave world in paper debt which is unpayable. Implement global surveylance. Start WW3, Collapse system and bring in One World Order for Jew King and Satan himself. Invite Mick Jagger to sing for the opening day party. I made the part about Jagger up, though I am sure they could afford the Stones. I hear Feinstein is a fan!

Wed, 07/09/2014 - 14:03 | 4940322 NotApplicable
NotApplicable's picture

You mean, "Sir Mick."

Wed, 07/09/2014 - 13:49 | 4940261 youngman
youngman's picture

They were happy because there is always a fee involved with a sale...

Wed, 07/09/2014 - 13:50 | 4940265 highly debtful
highly debtful's picture

Is it just me or do the hits just keep coming these days?

Wed, 07/09/2014 - 14:05 | 4940328 Bernoulli
Bernoulli's picture

They sure do.

Just the other deaf and blind people following mass media don't know about the hits yet...

Wed, 07/09/2014 - 14:07 | 4940335 junction
junction's picture

The next Franklin Templeton TV ad should show a roller coaster ride and ask investors to come along for the financial thrill of a lifetime.  Only this time, unlike in 2008, it looks like these PR bonds are going to derail as they bottom out, leaving investors wiped out. Tee hee, tee hee.

Wed, 07/09/2014 - 13:51 | 4940267 youngman
youngman's picture

69% to one country...that seems a little mismanaged to me...who got that payoff???? I bet they have a nice Villa onthe beach down of course

Wed, 07/09/2014 - 13:58 | 4940303 NotApplicable
NotApplicable's picture

My first thought as well.

I wonder... was it Corzine behind the scenes?

Wed, 07/09/2014 - 13:59 | 4940307 robilla
robilla's picture

You mean "one municipality"

PR isn't a country, or a state.

Wed, 07/09/2014 - 13:51 | 4940268 Stoploss
Stoploss's picture

.     .


Wed, 07/09/2014 - 13:51 | 4940270 AccreditedEYE
AccreditedEYE's picture

Cramer would tell you that this is why equities are the NEW muni bonds

Wed, 07/09/2014 - 13:56 | 4940296 astoriajoe
astoriajoe's picture

He still has a show?

Wed, 07/09/2014 - 13:53 | 4940279 Snoopy the Economist
Snoopy the Economist's picture

I doubt this will start the domino effect. But one can hope...

Wed, 07/09/2014 - 14:27 | 4940431 disabledvet
disabledvet's picture

These defaults have been happening for years now. "This is just the latest and greatest" dude.

Wed, 07/09/2014 - 14:39 | 4940476 Freddie
Freddie's picture


Domino Dancing = filmed in PR.

Wed, 07/09/2014 - 13:55 | 4940294 syntaxterror
syntaxterror's picture


What would Corzine do?

Wed, 07/09/2014 - 14:00 | 4940310 BadDog
BadDog's picture

steal everything in sight, then call in all his chits

Wed, 07/09/2014 - 16:39 | 4940876 Quantum Nucleonics
Quantum Nucleonics's picture

Buy more on 50 to 1 leverage, then destroy the paper trail if the whole thing turns to sh!t.

Wed, 07/09/2014 - 13:56 | 4940298 fonzannoon
fonzannoon's picture

UBS got their balls sued off for this too. 

Wed, 07/09/2014 - 14:00 | 4940309 ebworthen
ebworthen's picture

Any retirees chasing yield in risky paper instead of equities will be punished.

You get as little as possible on Treasuries, and the fudged CPI means no S.S. increases.

Start selling that heirloom jewelry and your gold teeth you slackers!

Dog and cat food is nutritious and cheap if you're hungry.


Wed, 07/09/2014 - 14:31 | 4940446 disabledvet
disabledvet's picture

"12% State of Illinois. Tax free. Backed by a trillion tons of coal."

Unless of course Federal Gaurantees are necessary. "Then we'll have to throw in the State of Israel too."

Wed, 07/09/2014 - 14:04 | 4940319 Dr. Engali
Dr. Engali's picture

Who in their right mind allocates 69% of their investment towards one entities distressed debt? Somebody using OPM that's who.

Wed, 07/09/2014 - 14:06 | 4940336 Bernoulli
Bernoulli's picture

Agree. I want the stuff that they are smoking...

Wed, 07/09/2014 - 14:09 | 4940353 ebworthen
ebworthen's picture


Wed, 07/09/2014 - 14:11 | 4940362 ShrNfr
ShrNfr's picture

Actually, if you look at the charter of the fund, it is to be tax exempt in all states. You do that only by investing in US territorie debt. Its 100% shit, not 69% shit. The question is one of who is greedy enough to go after a fund like that.

Wed, 07/09/2014 - 14:09 | 4940351 ShrNfr
ShrNfr's picture

That fund puts 100% into Guam, Virgin Islands, PR, etc. I would not touch it with a 10 ft. pole. 10% of their assets are in the Highway and Electric junk that is talking about restructuring. Maybe when it gets down to 10 cents on the dollar, it might be worth a flier.

Wed, 07/09/2014 - 14:17 | 4940389's picture

And who was a HUGE buyer of Ukranian debt?  Templeton...

Wed, 07/09/2014 - 14:32 | 4940451 disabledvet
disabledvet's picture

"Sir John Templeton." Look him up...

Wed, 07/09/2014 - 14:17 | 4940394 Paracelsus
Paracelsus's picture

Article on ZH today about Portugal.Seems topical everyone chatting about risk now.

I keep asking "who has the other side of this bet if it goes bad"?

If all roads lead to Rome,does all counterparty risk lead back to JP Morgan and its OTC derivatives?

Looks like excessive concentration of risk to me.I agree with some of the commentators here who say "If they have to stress test banks to restore confidence (and move the goalposts while doing it) then there is something stinky under the carpet.

Oh,and don't forget about Argentina.... 

Wed, 07/09/2014 - 14:34 | 4940460 disabledvet
disabledvet's picture

The sappers will start in Jerusalem and proceed from there.

Wed, 07/09/2014 - 14:28 | 4940437 Fuh Querada
Fuh Querada's picture

paging Meredith Whitney.....

Wed, 07/09/2014 - 14:31 | 4940448 Dark Space
Dark Space's picture

To be fair, this fund is not pricing as if it is a Puerto Rico bond at all. The Fund is spinning off a 5.98% dividend yield, while the cheapest PR debt is 9+%. The Fund is down 2%!!! in value from the start of the year vs the big GO bond from PR which is down 12.91% since inception earlier this year, or the PREPA bonds that are down 30-40% ytd.

The Fund has a LONG ways further down to go. Personally I'm a buyer of the bonds at the new low levels (both GO and PREPA, the latter is already pricing in 60-70% haircuts, which is likely a worst-case scenario), but the Fund is definitely at sell at these levels.

Wed, 07/09/2014 - 16:53 | 4940914 gallistic
gallistic's picture


Most people do not have a clue, and they are there to be fleeced. Moody's has their own (???) reasons, but it is refreshing to see someone who has done a little homework and dug into it beyond deceptive headlines. This is micro, and you have to really dig down to the local level to truly understand the situation.

I have skin in this game, and I think you are very astute; good luck to you.

If this works out, I will see you on the other side and the drinks are on me...

Wed, 07/09/2014 - 14:32 | 4940450 Baby Eating Dingo22
Baby Eating Dingo22's picture

USA dumped bad debt on to Puerto Rico

It's a good bank, bad bank thing

The place is a rathole and it's not like we ever intended to grant them statehood anyway

Wed, 07/09/2014 - 16:49 | 4940900 MrButtoMcFarty
MrButtoMcFarty's picture

4% Corporate Tax Rate

Big Tax Incentives

Nice climate

Nice beaches/hot women

4hr nonstop to JFK

No customs BS

Yeah....PR really sucks....

Wherever you are should stay there.


Wed, 07/09/2014 - 17:05 | 4940961 gallistic
gallistic's picture

With a name like baby eating dingo I have to ask- are you an Aussie?

Methinks you are talking out of your ass. For many years I had (and indirectly still have) business there. I have spent alot of time in Puerto Rico, and I can tell you categorically that it is not a "rathole". As a matter of fact, it is a pretty fucking spectacular and awesome tropical island.

What do you really know about "the place"?

Wed, 07/09/2014 - 15:30 | 4940686 U4 eee aaa
U4 eee aaa's picture

Risky Ricardo

Wed, 07/09/2014 - 16:22 | 4940839 Grinder74
Grinder74's picture

Sooo, have these highly-paid PM's never heard of CDS's?

Wed, 07/09/2014 - 21:01 | 4941621 Emergency Ward
Emergency Ward's picture

Doggone it, too late, just switched out of Argentina bonos into Puerto Rico bonos...

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