Fitch Tuesday downgraded PR general obligation and certain GO-linked credits to 'BB' from 'BBB-', resolving a negative rating watch from
US mutual funds have already sold much of their PR municipal bond holdings since
US mutual funds have historically invested in PR bonds because of its triple tax-exempt status and good liquidity compared to eligible non-PR issues. For example, a single-state fund investing in bonds exempt from Federal and
Sales of PR municipal bonds were more pronounced for single-state funds because they historically carried higher exposure. As of
The selling pressure converged prices among the two issues in fall of 2013. This allowed fund managers operating out of PR to trade in a number of their GO holdings for the higher quality COFINA bonds, which better positioned them to weather the GO downgrades that followed.
In addition to credit deterioration, the enactment of the new PRICA, which governs the island's mutual funds industry with over
PR bonds suffered strong price declines over the second half of 2013, but have stabilized recently. Prices of GO pension funding bonds, 2036 maturities, originally declined 56% since
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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.
Fund and Asset Management
Senior Director, +1-212-908-9123
Source: Fitch Ratings
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