The SEC is probing U.S. mutual funds to make sure they don’t blow up if Puerto Rico’s credit rating degrades further,
Bond Buyer’s Kyle Glazier and Taylor Riggs report.
Puerto Rico is facing a credit crisis. Its bonds having declined more than 19% in value in 2013, Bloomberg’s Michelle Kaske says. Although, S&P just reaffirmed its rating of BBB-.
The island’s economy has failed to fully recover from the financial crisis, and yields on 10-years now stand at nearly 8%.
Many funds — including 77% of muni bond mutual funds, according to Kaske — have huge exposure to the island’s debt because it is tax free. Franklin Templeton’s “Franklin Double Tax-Free Income A” fund comprises 61% Puerto Rico debt, and Oppenheimer Funds’ “Oppenheimer Rochester VA Municipal A,” contains 33% Puerto Rico debt, Bond Buyer reports.
While the SEC is qualifying its probes as “limited scope examinations,” the situation is now serious enough to merit closer scrutiny. Bond Buyer:
“Securities law experts said the SEC probes appear to be aimed both at understanding the potential effects on the market if the heavily-indebted commonwealth suffers a further downgrade or even a default. They also seem to be checking to make sure that funds investing in those bonds are adequately disclosing the risks involved in Puerto Rico debt.”
Because of its unique status as a U.S. territory, Puerto Rico can’t file for bankruptcy. The Obama Administration has said no federal bailout is imminent but that they are monitoring the situation.