Fitch: US Closed-End Funds Remain Cautious on Puerto Rico

NEW YORK--(BUSINESS WIRE)-- Puerto Rico's recent default on debt issued by the Governmental Development Bank (GDB) does not negatively affect any Fitch-rated U.S. closed-end fund (CEFs) obligations as their exposures to Puerto Rico remain limited, according to Fitch Ratings. However, fund managers exhibit a willingness to take modest, opportunistic exposures even as risks remain as the prospect of a default on the general obligation (GO) payments due on July 1 increases.

Puerto Rico's continued fiscal challenges have driven many fund managers mostly out of investments in the commonwealth and Fitch-rated funds have completely divested from the GDB credit. Seventy-five Fitch-rated U.S. CEFs hold some exposure to Puerto Rico totaling $460 million, and averaging 1.7% of total portfolio market value as of March 31.

Over the past six months, some funds have used the price volatility as an opportunity to selectively add to their Puerto Rico holdings. In some cases, managers have increased portfolio allocations to Puerto Rico to as much as 10.3%, albeit primarily in insured bonds and bonds backed by corporate obligors. Managers of rated funds who have increased exposures have been net buyers of $38 million of Puerto Rico bonds since Nov. 30, 2015 across 19 funds.

Current Puerto Rico holdings are concentrated in the sales tax-backed COFINA credit and the GO and GO guaranteed credits, which in aggregate account for close to 50% of total Puerto Rico allocations across the funds. Insured and pre-refunded bonds account for 80.4% of the total market value of Puerto Rico holdings.

Fitch's overcollateralization tests for rated obligations issued by CEFs take into account portfolio assets at market valuations and discount the value of the assets based on the characteristics of the securities and portfolio. Much of the uninsured debt already trades at distressed prices and is reflected in the funds' NAV. As a result, Fitch does not expect further price deterioration to affect Fitch overcollateralization tests at the funds' current rating levels.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160505006549/en/

Fitch Ratings
Brian Knudsen, +1-646-582-4904
Associate Director
Fund and Asset Management
Fitch Ratings
33 Whitehall Street
New York, NY
or
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Greg Fayvilevich, +1-212-908-9151
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Kellie Geressy-Nilsen, +1-212-908-9123
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Source: Fitch Ratings

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