Mutual funds that invested in Puerto Rico’s toxic government bonds are in for a rude awakening as the total sum of their debt ridden holdings continues to rise.
The total outstanding value for the mutual funds that gobbled up Puerto Rican debt amounts to $5.4 billion over the past five years, The Wall Street Journal reports. Mutual funds hold roughly $14.6 billion of Puerto Rico’s $73 billion in outstanding bonds.
The majority of the debt is held by a handful of firms, including Franklin Resources Inc., OppenheimerFunds Inc., Vanguard Group and Goldman Sachs Asset Management.
Puerto Rico is an enticing investment opportunity for mutual funds because its government bonds are tax-exempt in the U.S. The nation last issued bonds to the market in March 2014, offering investors an attractive eight percent interest rate. Nearly a dozen mutual funds purchased $263 million in the first-quarter Puerto Rico offered these bonds.
Since Puerto Rican debt was paying nearly 10 percent of its principal in interest, U.S. investors were willing to overlook the investments relative risk in order to gain an incredibly lucrative return.
As investors scooped up tens of billions of dollars in the Puerto Rican bond market, Puerto Rico’s government financed expensive projects, government expansion and everyday needs. Essentially, Puerto Rico was funding its governments debts with more debt.
Financial experts predict that mutual funds will not get dollar-for-dollar compensation for their losses, as is the case with most municipal or government bankruptcy cases. When the city of Detroit went bankrupt in 2013, the city paid an average of 81 cents on the dollar on its bonds.
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